Question

Happy Frog Inc. is analyzing a project with the following cash flows: Year Cash Flow 0 -$762,000 1 $300,000 2 $-550,000 3 $660,000 4 $440,000 This project has cash flows. Happy Frog Inc.’s WACC is 8.00%. Calculate this project’s modified internal rate of return (MIRR).

Answer 1

Happy Frog Inc.

Modified Internal Rate of Return (MIRR) = (Future value of positive cash flows / present value of negative cash flows) (1/n) – 1

= ($1,400,000 /-$1,198,700) (1/5) - 1

= -1.167932 x -0.8

= 0.934

MIRR = 9.34%

Step-by-step explanation:

a) Future Value of positive cash flows:

1 $300,000

3 $660,000

4 $440,000

Total $1,400,000

b) Present value of negative cash flows:

0 -$762,000

2 -$436,700 ($550,000 x 0.794)

Total -$1,198,700

c) The Modified Internal Rate of Return for Happy Frog Inc. is greater than its Weighted Average Cost of Capital. Therefore, the project looks very promising and should be accepted.