Solo corp. is evaluating a project with the following cash flows: year cash flow 0 –$ 47,000 1 16,900 2 20,300 3 25,800 4 19,600 5 – 9,500 the company uses an interest rate of 10 percent on all of its projects. a. calculate the mirr of the project using the discounting approach method.

a) MIRR=19.68%

Explanation:

The MIRR or Modified Internal Rate of Return assumes that positive cash flows are reinverted at the firm's capital cost and the negative cash flows are financed at the firm's financial cost.

One of the ways of calculating the MIRR is the discounting approach method. In this method, all negative cash flows are calculated at present value with the discount rate. The positive cash flows remain at the time at which they occur.

In this case, we have positive cash flows in years 1 to 4, and negative cahs flows in year 0 and 5.

First, we have to calculate the present value of the negative cash flows. The one that occur at year 0 is already its present value.

The negative cash flow of year 5 has a present value of -$5897.

Now we have this modified cash flow:

Year 0: -47,000-5,897=-52,897

Year 1: +16,900

Year 2: +20,300

Year 3: +25,800

Year 4: +19,600

We can express this as the net present value and equal this to 0 to calculate the MIRR, as we calculated the IRR:

With iteration we calculate MIRR=19.68%

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