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, $2129)
C) (-$5,000, $5000)
D) (-$2,000, $2192.23)

Question

Quizplus · Accepted Answer

To calculate the modified internal rate of return (MIRR) at a discount rate of 10%, we need to find the terminal value of the cash inflows at the end of period 3 using the formula:

Terminal value = -$25,000 / (1+10%)^2 = -$19,008.26

Then, we need to find the discount rate that equates the present value of the negative cash flows with the future value of the positive cash flows at the end of period 3. We can do this using the formula:

PV of negative cash flows = -$2,000 - $25,000/(1+r)^1 + $19,008.26/(1+r)^2 = 0

Solving for r using a financial calculator or Excel gives us the MIRR at 10%:

r = 15.1535%

Therefore, the best choice is D, which includes the first two cash flows of the project.

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