Question

Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of $13,000 the first year, $15,000 the second year, $18,000 the third year, -$8,000 the fourth year, $25,000 the fifth year, $31,000 the sixth year, $34,000 the seventh year, and -$6,000 the eighth year. The project would cost the firm $67,100. If the firm's cost of capital is 12%, what is the modified internal rate of return?

Answer 1

The Modified Internal Rate of Return (MIRR) calculates a project's rate of return by incorporating the cost of capital and assuming all negative and positive cash flows over an investment period.

Step-by-step explanation:

The Modified Internal Rate of Return (MIRR) is a financial measure used to assess the attractiveness of an investment by evaluating the time value of money and incorporating the cost of capital.

In this case, with a firm's cost of capital at 12%, the MIRR is calculated based on the project's expected cash flows over eight years, which include both positive and negative amounts.

The MIRR is found using financial functions or a financial calculator, which cumulate cash outflows at the cost of capital rate and future cash inflows at the reinvestment rate till the end of the project to derive a single rate that discounts all cash flows to a net present value of zero.