Chapter 9, Problem 10PROB

Summary Introduction

Modified Internal Rate of Return (MIRR) is the discount rate at which the present value of cash outflows is equal to the present value of the terminal cash flow. Here, the terminal value is calculated using the same required rate of return which is used to calculate the present value of cash outflows.

$\begin{array}{l}{\displaystyle \sum _{t=0}^n\frac{CO{F}_t}{{\left(1+r\right)}^t}}=\frac{{\displaystyle \sum _{t=1}^{n}CI{F}_t{\left(1+r\right)}^{n-t}}}{{\left(1+MIRR\right)}^n}\\ MIRR=\sqrt[n]{\frac{{\displaystyle \sum _{t=1}^{n}CI{F}_t{\left(1+r\right)}^{n-t}}}{{\displaystyle \sum _{t=0}^n\frac{CO{F}_t}{{\left(1+r\right)}^t}}}}-1\end{array}$

Here,

All the cash outflows at time “t” is “$CO{F}_t$”

All the cash inflows at time “t” is “$CI{F}_t$”

Required rate of return is “r”

Modified Internal Rate of Return is “MIRR”

A project cost $82000 and is expected to generate $35,000, $70,000 and -$10,450 for Year 1,2 and 3 respectively. The required rate of return is 12%.