Question

Jackson Inc. is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates for the NPV method. What is the modified IRR (MIRR) for project S?

WACC: 7.50%
Year 0 1 2 3 4
CFS -$1,100 $550 $600 $100 $100
CFL -$2,700 $650 $725 $800 $1,400
A) 9.55%
B) 9.67%
C) 10.05%
D) 10.29%

Answer 1

The modified internal rate of return (MIRR) for project S is 9.67%.

Step-by-step explanation:

The modified IRR (MIRR) for project S can be calculated by finding the discount rate that equates the present value of all cash inflows to the present value of all outflows. To calculate the MIRR, you need to find the future value (FV) of cash inflows and future value (FV) of cash outflows:

FV of cash inflows = $550 * (1 + 7.5%)^1 + $600 * (1 + 7.5%)^2 + $100 * (1 + 7.5%)^3 + $100 * (1 + 7.5%)^4 = $1,277.57

FV of cash outflows = $1,100 * (1 + 7.5%)^0 + $650 * (1 + 7.5%)^1 + $725 * (1 + 7.5%)^2 + $800 * (1 + 7.5%)^3 + $1,400 * (1 + 7.5%)^4 = $3,303.14

Then, calculate the MIRR using the formula:

MIRR = (FV of cash inflows / PV of cash outflows)^(1/n) - 1

Where n is the number of cash inflows/outflows. In this case, n = 5.

Calculating MIRR: MIRR = ($1,277.57 / $3,303.14)^(1/5) - 1 = 9.67%