Question

Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

Answer 1

Answer and Explanation:

The computation of the MIRR is shown below:

But before that terminal cash flow required to calculate

Year       Cash Flows    FV Factor Formula      Terminal Value

                                                                      (Cash Flow × FV Factor)

0             ($1,000)    

1               $450                 1.21                (1 +10%)^(2)      $545

2             $450                   1.1                 (1 + 10%)^(1)     $495

3            $450                   1                       1                 $450

Terminal Cash Flow                                                      $1,490

now the MIRR is

$MIRR = \sqrt[n]{\frac{terminal\ cash\ flow}{initial\ investment} } - 1\\\\= \sqrt[3]{\frac{\ 1,490}{\ 1,000} } - 1$

= 14.22%

As it can be seen that the MIRR is more than the WACC so the project should be accepted.