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?

Question
Asked Jan 23, 2019
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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?

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Expert Answer

Step 1

For the purpose of MIRR calculation, we will have to first separate the positive and negative cash flows. Then:

  • All negative cash flows will have to be shifted to the start i.e t = 0 using the present value method
  • All positive cash flows will have to shifted to the terminal year i.e. t = 7 using the future value method
  • We will have to then calculate the MIRR using the standard formula
Step 2

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. 

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Step 3

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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