Assuming the appropriate interest rate is 8 percent, what is the MIRR for this project using the discounting? approach
A project has the following cash flows :
| Year | Cash Flows |
|---|---|
| 0 | −$ 12,200 |
| 1 | 5,410 |
| 2 | 7,810 |
| 3 | 5,200 |
| 4 | −1,540 |
Assuming the appropriate interest rate is 8 percent, what is the MIRR for this project using the discounting? approach
MIRR stands for Modified Internal Rate of Return. It is a financial metric used to evaluate the performance of an investment or project by taking into account the costs and benefits of the investment as well as the financing costs. MIRR calculates the average rate of return on an investment over its life, assuming that any negative cash flows are reinvested at the cost of capital and any positive cash flows are reinvested at the rate that the investment would yield if the positive cash flows were invested elsewhere.
To calculate MIRR, First we need to find the Present value of all the cash outflows.
- Initially there is a cash outflow of -$12,200. Since it is an initial outflow. It doesn't need to be discounted.
- Then there is a cash outflow of -$1,540 in year 4. The present value of this cash outflow is calculated using the following formula:
PV =CFt /( 1+r)t
where CFt is cash flow in time period t, r is the interest rate used for discounting.
We apply the above formula to the get the present value(PV) for the cash outflow in year 4 as shown below:
PV = -1540/(1+8%)^4 = -$1131.95 - The present value of all the cash outflows is calculated as:
-$12,200+(-$1131.95)= -$13331.95
(Note: Since it is an outflow, the value is negative)
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