Down Under stores are considering an investment with an intial cost of $236,00. In Year 4, the project will require an additional investment and finally, the project will be shut down in Year 7. The annual cash flows for Years 1 - 7 are projected as $64,000, $87,000 $91,000, -$48,000, $122,000, $154,000, and -$30,000. If all negative cash flows are moved to Time 0 using a discount rate of 13%, what is the project's modified IRR?
For the purpose of MIRR calculation, we will have to first separate the positive and negative cash flows. Then:
A cash flow in future can be shifted to t=0 using the present value formula as shown on the whiteboard, where r= discount rate = 13% and n = nos. of years between t=0 and t when the negative cah flow actually occurs.
All negative cash flows have been identified and shifted to t=0 using the PV formula shown in the earlier step, in the table below:
r= discount rate = 13% = 0.13
Period of occurrence (t) | Negative Cash flow (FV) | Periods between t=0 and actual occurrence (n) = (t) - 0 | Discount factor 1 / (1 + r)n | PV = FV x Discount factor |
0 | 236,000.00 | 0 | 1.00000000 | 236,000.00 |
4 | 48,000.00 | 4 | 0.613318728 | 29,439.30 |
7 | 30,000.00 | 7 | 0.425060644 | 12,751.82 |
Total | 314,000.00 | 278,191.12 |
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