Question

Aviation Inc. is considering a new inventory system that will cost $375,000. The system is expected to generate $315,000 in year one, -$25,000 (negative) in year two, $110,000 in year three, and $150,000 in year four. Aviation's required rate of return is 10%. What is the MIRR (Modified Internal Rate of Return) of this project?
a) 13.51%
b) 16.37%
c) 10.00%
d) 14.93%

Answer 1

Answer:

d) 14.93%

Explanation:

initial outlay = -$375,000

cash flow year 1 = $315,000

cash flow year 2 = -$25,000

cash flow year 3 = $110,000

cash flow year 4 = $150,000

Since there are two cash outflows, we will have two different IRRs.

We can use an excel spreadsheet and the MIRR function to solve this:

=MIRR (-375000 to 150000, 10%, 10%) = 14.93%

unless told otherwise, we should use the discount rate as both our finance and reinvestment rate.