Question

TRV is expecting to purchase a new manufacturing line. It is expected to cost 119,000 and will require an additional 12,000 to set-up. It will generate $25,000 annually for the next 5 years. What is the modified internal rate of return if the cost of capital is 12% and the expected rate on reinvestments is equal to 8%?

Answer 1

2.28%

Explanation: Given the following :

Expected cost = 119,000

Additional cost = 12,000

Cash Inflow = $25,000

Number of years = 5 years

Cost of capital = 12%

Reinvestment rate = 8%

The Modified Internal rate of return is used to evaluate the yield on an investment over a certain period of time. The Modified Internal rate of return is similar to the internal rate of return, however, the difference between the lies in the fact that MIRR takes into account that profit accrued each year is reinvested at a steady rate called the Reinvestment rate.

MIRR can be calculated using excel or the online calculators by taking into account the value range, the financing rate and the Reinvestment rate.

Using the Omni MIRR calculator :

Cash inflow of 25,000 over 5 years

Reinvestment rate of 8%

Financing rate of 12%

Total initial investment of (119,000 + 12000) = 131,000

MIRR value = 2.28%