CFA Level 1 Project: Calculation of MIRR

Project's MIRR Calculation

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Question

A 5-year project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. If the project's cost of capital is 7.5%, the project's MIRR equals ________.

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A

The MIRR is defined as that rate which discounts the terminal value of the cash inflows to equate to the present value of a project's costs (using the project's cost of capital). This can be better understood using actual numbers. The present value of the costs = 650 + 700/1.075 + 900/1.075^2 = 2,080. The terminal value

(future value at the end of year 5) of the project equals 1,200*1.075^2 + 1,600*1.075 + 2,300 = 5406.75. Note that both these are calculated using the project's cost of capital. Then, MIRR satisfies 2,080 = 5406.75/(1+MIrr)^5. Solving gives MIRR = 21%.

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