Suppose that a project has a cash flow pattern (-$2,000, $25,000,- $25000). For its modified IRR at a discount rate of 10%, the relevant numbers are:
A) (-$2,000, $25,000)
B) (-$2,000, $2,129)
C) (-$5,000, $5,000)
D) (-$2,000, $2,273)

Question

Quizplus · Accepted Answer

The Modified Internal Rate of Return (MIRR) considers both the cost of investment and the interest received on reinvestment of cash. In this case, the negative cash flow of -$25,000 at the end is reinvested at the finance rate (10% here), so we calculate the future value of -$25,000 at 10% for one period. This gives us -$25,000 * (1 + 0.10) = -$27,500. The initial investment is -$2,000, so the cash flow pattern for MIRR calculation becomes (-$2,000, $27,500). To find the equivalent annual cash flow at 10%, we use the formula for the future value of a single sum: $27,500 = X * (1 + 0.10), solving for X gives us approximately $2,273, hence the correct cash flow pattern for MIRR calculation is (-$2,000, $2,273).

Suppose That a Project Has a Cash Flow Pattern (-$2,000