To calculate: The MIRR (Modified
Introduction:
MIRR is the modified internal rate of return, which is a financial measure of attracting the investments. It is utilized in capital budgeting to rank the alternative investments of same size.
Answer to Problem 20QP
The MIRR for the project using the discounted approach is 19.66%, reinvestment approach is 13.95%, and combination approach is 13.49%.
Explanation of Solution
Given information:
Company S is assessing a project, where the cash flows are$11,200, $13,900, $15,800, $12,900, and -$9,400 for year 1, 2, 3, 4, and 5 respectively. The initial cost is $29,000.
Discounted approach:
Note: In this approach, compute the negative cash outflows value for the year 0. On the other hand, the positive cash flows remain at its time of occurrence. The rate of discount is 11%. So, discount the cash outflows to year 0.
Hence, the discounted cash flow at time 0 is -$34,578.44.
Equation of MIRR in discounted approach:
Compute MIRR using a spreadsheet:
Step 1:
- Type the equation of
NPV in H6 in the spreadsheet and consider the IRR value as H7
Step 2:
- Assume the IRRvalue as 10%
Step 3:
- In the spreadsheet go to data, and select What-If-Analysis
- In What-If-Analysis, select goal seek
- In set cell, select H6 (the formula)
- The “To value” is considered as 0 (the assumption value for NPV)
- The H7 cell is selected for the 'by changing cell'
Step 4:
- Following the previous step, click OK in the goal seek status. The goal seek status appears with the IRRvalue
Step 5:
- Thevalue appears to be 19.6642180259706%.
Hence, the MIRRvalue is 19.66%.
Reinvestment approach:
Note: In this approach, compute the
Hence, the reinvesting cash flow at time 5 is $55,708.59.
Equation of MIRR in reinvestment approach:
Compute the MIRR:
Hence, the MIRR is 13.95%.
Combination approach:
In this approach, compute all the cash outflows at year 0 utilizing the rate of discount and all the
Hence, the total
Hence, the value of total cash inflows is $65,108.59.
Equation of MIRR in combination approach:
Compute the MIRR:
Hence, the MIRR is 13.49%.
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Chapter 9 Solutions
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