Ehrmann Data Systems is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC: 10.00%

Year 0 1 2 3

Cash flows - $2,000 $800 $800 $1,000

A. 10.48%

B. 11.25%

C. 12.50%

D. 13.78%

E. 14.20%

14.30% or answer e.

Explanation:

MIRR stands for Modified IRR, and unlike a regular IRR, MIRR assumes that reinvested future cash flows are done so at WACC instead of at IRR.

To find MIRR we must take our cash flows and find the sum of the future value of these cash flows invested at WACC.

For example, for our first Cash Flow in year 1, our future value is:

= 450 x (1 + WACC) ^2

where 450 is the cash flow, WACC is going to be 10.25% and our time is 2 years until the end of the project.

We do this for all three cash flows and sum their future values to get 1493.

We find MIRR as:

MIRR = ((sum of future CFs/initial investment) ^ (1/t)) - 1

where t = time

thus we have = ((1493/1000) ^ (1/3)) - 1 = 14.30% or answer e.