Final answer:
The Modified Internal Rate of Return (MIRR) is a financial metric used to determine the profitability of an investment project. To calculate the MIRR, you need to discount the cash flows at the project's cost of capital and then reinvest the positive cash flows at the reinvestment rate. For the given cash flows, the MIRR can be calculated as approximately 75.59%.
Step-by-step explanation:
The Modified Internal Rate of Return (MIRR) is a financial metric used to determine the profitability of an investment project by taking into account both the cost of capital and the reinvestment rate of cash flows. To calculate the MIRR of a project, you need to discount the cash inflows and outflows at the project's cost of capital and then reinvest the positive cash flows at the reinvestment rate.
In this case, Alipapa Inc. is considering a project with cash flows of -$800, $500, $500, and $500 for years 0, 1, 2, and 3 respectively. To calculate the MIRR, you would discount the cash flows at the project's Weighted Average Cost of Capital (WACC) of 10%, and then reinvest the positive cash flows at a specified reinvestment rate.
To find the MIRR, you can use the formula:
MIRR = [(1 + reinvestment rate)^(n-1)] * [PV(inflows) / PV(outflows)]^(1/n) - 1
Where:
- reinvestment rate: The rate at which positive cash flows are reinvested.
- n: The number of periods.
- PV(inflows): The present value of the positive cash flows.
- PV(outflows): The present value of the negative cash flows.
Using the cash flows provided, the PV(inflows) = $500 / (1.10)^1 + $500 / (1.10)^2 + $500 / (1.10)^3
= $125 + $113.64 + $103.31
= $341.95.
The PV(outflows) = $800 / (1.10)^0 = $800.
Assuming a reinvestment rate of 10%, the MIRR would be:
MIRR = [(1 + 0.10)^(3-1)] * (341.95 / 800)^(1/3) - 1
MIRR = 1.21 * 0.6229 - 1 = 0.7559 or 75.59%