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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Vikram Auto invests ₹1,00,000 in a project with cash inflows of ₹60,000 at the end of year 1 and ₹78,000 at the end of year 2. Inflows are reinvested at the firm's cost of capital of 10%. What is the modified internal rate of return (MIRR)?

The MIRR is 20%. Compounding the year 1 inflow at 10% gives ₹66,000, which with ₹78,000 makes a terminal value of ₹1,44,000. The square root of 1.44 less one is 20%. Simply dividing the 44% total gain by two is wrong.

  1. A20%Correct
  2. B22%
  3. C44%
  4. D10%

Explanation

Terminal value = 60,000 × 1.10 + 78,000 = 66,000 + 78,000 = ₹1,44,000. MIRR: (1,44,000/1,00,000)^(1/2) − 1 = √1.44 − 1 = 20%. The 44% figure is the total gain not annualised, and 22% simply halves it, ignoring compounding.

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