Question

Buzz Lightyear has been offered an investment in which he expects to receive payments of $4,000 at the end of each of the next 10 years in return for an initial investment of $10,000 now. Enter percentage values to 2 decimals (10.52% entered as 10.52)

a. What is the IRR of the proposed investment? %

b. What is the MIRR of the proposed investment? Assume a cost capital of 10%. %

Answer 1

a.

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

10,000 = 4000/(1.0x) +4000/ (1.0x)^2 +4000/(1.0x)^3+...............+ $4000/(1.0x)^10   

Or x= 38.455%

Hence the IRR is 38.45%

b.

Present Value of Inflows =$ 4000 * 1/(1.1) ^ 1 +$ 4000 * 1/(1.1) ^ 2+$ 4000 * 1/(1.1) ^ 3+..........$ 4000 * 1/(1.1) ^ 10

= $ 24,578.27

Future Value of Inflows = Present Value of Inflows * ( 1+ Rate of Interest ) ^ Time

=$ 24,578.27 * ( 1+10%)^10

= $ 63,749.70249

MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

= [$63,749.70249 / $ 10,000] ^ (1/10)-1

= 20.35%

Hence the correct answer is 20.35%