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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Rao Engineering invests ₹1,00,000 in a project with cash inflows of ₹40,000, ₹50,000 and ₹60,000 at the end of years 1, 2 and 3. The firm's cost of capital and the reinvestment rate for interim inflows are both 10%. What is the modified internal rate of return (MIRR), approximately?

MIRR is approximately 17.8%. Compounding the inflows at 10% to year 3 gives a terminal value of ₹1,63,400. The MIRR is the rate at which ₹1,00,000 grows to this value in three years, which is 1.634 raised to one-third, minus one.

  1. A17.8%Correct
  2. B21.1%
  3. C14.5%
  4. D63.4%

Explanation

Terminal value at end of year 3 = 40,000×1.21 + 50,000×1.10 + 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 ≈ 17.8%. Check: 1.178³ ≈ 1.635. Using the undiscounted sum of 1,50,000 gives 14.5%, which ignores reinvestment growth.

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