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I am an investor in a company. We are considering a project which involves opening a new store at a cost of $10,000,000 at t = 0. The project is expected to have operating cash flows of $5,000,000 at the end of each of the next 4 years. However, the facility will have to be repaired at a cost of $6,000,000 at the end of the second year. Thus, at the end of Year 2 there will be a $5,000,000 operating cash inflow and an outflow of -$6,000,000 for repairs. The company's cost of capital is 15 percent. What is the difference between the project's MIRR and its regular IRR?

Solution Preview

The first thing to do is to put down the cash flows.
Year 0 Cash outflow = -10,000,000
Year 1 Cash inflow = 5,000,000
Year 2 Cash inflow = 5,000,000 and cash outflow = 6,000,000 and so the net in -1,000,000
Year 3 Cash inflow = 5,000,000
Year 4 Cash inflow = 5,000,000

We can use excel to calculate the IRR and MIRR and find the difference. Using excel the IRR comes to 13.78% and MIRR comes to 14.29% and the difference is 0.51%.

If you wish to do manually
IRR is the rate that will make the PV of cash flows equal ...

Solution Summary

The solution explains how to calculate the MIRR and IRR for a project.