CA Intermediate · Financial Management and Strategic Management · Investment Decisions
Rohan Auto 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. Inflows are reinvested at 10% and the financing cost is also 10%. Using the modified IRR method, the MIRR is closest to:
The MIRR is about 17.8%. Compounding the inflows to year 3 at 10% gives a terminal value of ₹1,63,400. Dividing by the ₹1,00,000 outlay gives 1.634, and the cube root of that ratio minus one is roughly 17.8%.
- A10.0%
- B21.1%
- C17.8%Correct
- D63.4%
Explanation
Terminal value = 40,000×1.21 + 50,000×1.10 + 60,000 = 48,400 + 55,000 + 60,000 = 1,63,400. The ratio TV/outlay is 1.634, and its cube root is about 1.178, so MIRR is about 17.8%. The 63.4% figure is the total gain and 21.1% is the simple annual average of that gain. Neither compounds over 3 years.
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