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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Dhruv Engineering invests ₹1,00,000 now in a project with cash inflows of ₹40,000, ₹50,000 and ₹60,000 at the end of years 1, 2 and 3 respectively. Inflows are reinvested at 10% until the end of year 3. Using the modified internal rate of return (MIRR) method, the MIRR is approximately:

MIRR is about 17.8%. Compounding the inflows at 10% to the end of year 3 gives a terminal value of ₹1,63,400, and the cube root of 1.634 minus 1 gives roughly 17.8%. Dividing the 63.4% total gain by three is wrong.

  1. A17.8%Correct
  2. B21.1%
  3. C63.4%
  4. D12.5%

Explanation

Terminal value = 40,000 x 1.21 + 50,000 x 1.10 + 60,000 = 48,400 + 55,000 + 60,000 = ₹1,63,400. MIRR = (1,63,400 / 1,00,000)^(1/3) - 1 = 1.634^(1/3) - 1, which is about 17.8% (check: 1.178^3 is about 1.635). The 63.4% figure is total gain not annualised, and 21.1% divides that by 3.

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