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Homework answers / question archive / For the nonconventional net cash flow series shown, the external rate of return per year using the MIRR method, with an investment rate of 20% per year and a borrowing rate of 8% per year, is closest to: Year NCF, $ 0 -40,000 1 +13,469 2 -29,000 3 +25,000 4 +50,966
For the nonconventional net cash flow series shown, the external rate of return per year using the MIRR method, with an investment rate of 20% per year and a borrowing rate of 8% per year, is closest to: Year NCF, $ 0 -40,000 1 +13,469 2 -29,000 3 +25,000 4 +50,966
Ans
Reinvestment rate r = 20% or 0.2 , its is use in Future value calculation
Borrowing rate i = 8% or 0.08 , it is use in present value calculation.
Year n = 4 years
Future value calculations are cash flow calculate from end to beginning of positive values.
FV = 13469(1+0.2)3 + 25000(1+0.2) + 50966 = 104240.43
Present value of negative cash flow.
PV = 40000 + 29000/(1+0.08)2 = 64862.83
External rate of returns = (FV/PV)1/4 - 1
External rate of returns = (104240.43/64862.83)1/4 - 1
External rate of returns = 1.12592659 - 1
External rate of returns = 0.12592659 or 12.592%