Answer:
The modified internal rate of return is 15.67%.
Explanation:
Note: See the attached excel file for the calculation of the total present value of the after-tax cash flows.
From the attached excel file, we have:
Total present value of the after-tax cash flows = $40,332.66
The modified internal rate of return (MIRR) can be calculated using the following formula:
MIRR = (PV / Outlay)^(1/n) * (1 + r) - 1……………….. (2)
Where;
PV = Total present value of the after-tax cash flows = $40,332.66
Outlay = Absolute value of cost of the project = $47,300
r = cost of capital = 18%, or 0.18
n = number of years = 8
Substitute the values into equation (1) to have:
MIRR = ($40,332.66 / 47,300)^(1/8) * (1 + 0.18) - 1 = 0.1567, or 15.67%
Therefore, the modified internal rate of return is 15.67%.
