Question

Question Help (Calculating MIRR) OTR Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project will require an initial cash outlay of $19.5 million and will generate annual cash inflows of $3.5 million per year for Years 1 through 3. In Year 4, the project will provide a net negative cash flow of $4.5 million due to anticipated expansion of and repairs to the facility. During Years 5 through 10, the project will provide cash inflows of $1.6 million per year. a. Calculate the project's NPV and IRR where the discount rate is 11.8 percent. Is the project a worthwhile investment based on these two measures? Why or why not? b. Calculate the project's MIRR. Is the project a worthwhile investment based on this measure? Why or why not?

Answer 1

Cash flow year 0 =-19.5
Cash flow year 1=3.5
Cash flow year 2=3.5
​​​​​​​Cash flow year 3=3.5
​​​​​​​Cash flow year 4=-4.5
​​​​​​​Cash flow year 5 to 10 =1.6

NPV of cash flows =-19.5+3.5*((1-(1+11.8%)^-3)/11.8%-4.5/(1+11.8%)^4+1.6*((1-(1+11.8%)^-6)/11.8%)/(1+11.8%)^4 =-4.31%

IRR using excel formula

	A	B	C	D	E	F	G	H	I	J	K
1	Year0	Year1	Year2	Year3	Year4	Year5	Year6	Year7	Year8	Year9	Year10
2	-19.5	3.5	3.5	3.5	-4.5	1.6	1.6	1.6	1.6	1.6	1.6
3	-4.31%	Excel formula=IRR(A2:K2)

NO based on IRR and NPV the project is not acceptable.

b. MIRR =(FV of Cash inflows/PV of Cash outflows)^(1/n)-1
FV of Cash inflows =3.5*(1+11.8%)^9+3.5*(1+11.8%)^8+3.5*(1+11.8%)^7+1.6*(1+11.8%)^5+1.6*(1+11.8%)^4+1.6*(1+11.8%)^3+1.6*(1+11.8%)^2+1.6*(1+11.8%)^1+1.6=38.653826266
PV of Cash flows =19.5+4.5/(1+11.8%)^4 =22.380350
MIRR=(38.653826266/22.380350)^(1/10)-1 =5.62%

Since MIRR is less than WACC hence investment is not worthwhile