Capitol City Transfer Company's New Terminal Project

Modified Internal Rate of Return (MIRR) Calculation

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Question

Capitol City Transfer Company is considering building a new terminal in Salt Lake City. If the company goes ahead with the project, it must spend $1 million immediately (at t = 0) and another $1 million at the end of Year 1 (t = 1). It will then receive net cash flows of $0.5 million at the end of Years 2 - 5, and it expects to sell the property and net $1 million at the end of Year 6. All cash inflows and outflows are after taxes. The company's cost of capital is 12 percent, and it uses the modified IRR criterion for capital budgeting decisions. What is the project's modified IRR?

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A. B. C. D. E.

E

Time line: (In millions)

k = 12%

MIRR = ?

0123456 Yrs

-1-1.5.5.5.51.0

Tabular/Numerical solution:

PV(Outflows) = -$1,000,000 - ($1,000,000/1.12) = $1,892,857.

TV(Inflows) = $500,000(FVIFA(12%,4))(FVIF(12%,1)) + $1,000,000

= $500,000(4.7793)(1.12) + $1,000,000 = $3,676.408.

$1,892,857 = $3,676,408/(PVIF(MIrr,6)0

PVIF(MIrr,6) = 1.94225 (Take 6th root of both sides)

1 + MIRR = 1.11699

MIRR = 11.699%.

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