Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate

Corbett and Sullivan Enterprises (CSE) use the Modified Internal Rate of Return (MIRR) when evaluating projects. CSE’s cost of capital is 9.5%.

What is the MIRR of a project if the initial costs are $10,200,000 and the project lasts seven years, with each year producing the same after-tax cash inflows of $1,900,000?
A) About 7.95%
B) About 8.01%
C) About 8.24%
D) About 8.88%

ANSWER

Answer: C
Explanation: C) Step One. Find the future values of all the cash inflow by reinvesting the cash inflow at the appropriate cost of capital. We can use the future value annuity formula, given that the cash inflow stream is identical. We have: FV = $1,900,000 × = $1,900,000 × = $1,900,000 × 9.342648. Thus, FV = $17,751,032.
Step Two. Find the present value of the cash outflow by discounting at the appropriate cost of capital. This is the initial cash outflow of $10,200,000 because all investment is made at the start of the project. Expressing the cash outflow in absolute terms: PV= $10,200,000.
Step Three. Find the interest rate that equates the present value of the cash outflow with the future value of the cash inflow given as: MIRR = (FV / PV)n – 1 = ($17,751,032 / $10,200,000)1/ 7 – 1 = (1.740297)1/ 7 – 1 = 1.082368 – 1 = 0.082368, or about 8.24%.