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

Answer:

2.28%

Explanation:

initial outlay = $119,000 + $12,000 = $131,000

cash flows 1 - 5 = $25,000

Re = 12%

rate of reinvestments = 8%

using a financial calculator, the MIRR = 2.28%

if you want to calculate MIRR manually, you must solve the following:

MIRR = ⁿ√(future value of cash flows at reinvested rate / present value of negative values discounted at financing rate) - 1

• n = 5
• future value of cash flows at reinvested rate = $25,000 x 5.8666 (FV annuity factor) = $146,665
• present value of negative cash flows = $131,000

MIRR = ⁵√($146,665 / $131,000) - 1 = 1.0228 - 1 = 0.0228 = 2.28%