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MIRR calculation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA APM Exams › MIRR calculation

  • This topic has 6 replies, 2 voices, and was last updated 10 years ago by atab.
Viewing 7 posts - 1 through 7 (of 7 total)
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  • November 26, 2014 at 2:24 pm #213448
    atab
    Member
    • Topics: 82
    • Replies: 185
    • β˜†β˜†β˜†

    Hi,

    I can’t seem to get any MIRR calculation correct πŸ™ can you explain how MIRR is calculated please?

    Thanks

    November 26, 2014 at 3:35 pm #213462
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10595
    • β˜†β˜†β˜†β˜†β˜†

    Discount all outflows to time 0.

    Take all inflows to the last year of the project by compounding up at the discount rate.

    You now have two flows: time 0 outflow and time n inflow. This lets you find the discount rate.

    So, if we had the following cash flows:

    T0 -10,000, T1 + 6,000, T2 + 12,000, T3 – 4,000

    At a d/c rate of 10%, PV of outflows = -10,000 – 4,000 x 0.751 = -13,004.

    Terminal value of inflows as at time 3, the end of the project = 6,000 x 1.1 x 1.1 + 12,000 x 1.1 = 20,460

    Find the IRR of the two flows ie where PV of inflows = outflow:

    13,004 = 20,460/(1+r)^3
    (1+r)^3 = 20,460/13,004 = 1.573
    1+r = Cube root of 1.573 = 1.163

    MIRR = 0.163 or 16.3%

    November 26, 2014 at 7:13 pm #213543
    atab
    Member
    • Topics: 82
    • Replies: 185
    • β˜†β˜†β˜†

    I’m struggling to understand this πŸ™

    For example in example 3 of Chapter 15 – Discounted Cash Flow techniques I came to the following:

    PV of return phase = 2,258,000
    PV of investment phase = 2,000,000

    MIRR = [2,258,000/2,000,000]^1/5(1+0.10)-1 = 10.24%

    However, when I looked at the answer it is 12.7%

    I can’t understand what I did wrong πŸ™

    November 26, 2014 at 8:03 pm #213557
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10595
    • β˜†β˜†β˜†β˜†β˜†

    You have to take the inflows up to year 5:

    1508 + 430 x 1.1 + 417 x 1.21 + 410 x 1.331 + 606 x 1.4641 = 3637

    (3638/2000)^1/5 = 1.127 = 1 + r

    r = 12.7%

    November 26, 2014 at 10:36 pm #213604
    atab
    Member
    • Topics: 82
    • Replies: 185
    • β˜†β˜†β˜†

    But 2,258,000 is the total inflows up to year 5…the answer also says its 2,258,000… πŸ™

    November 27, 2014 at 7:22 am #213678
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10595
    • β˜†β˜†β˜†β˜†β˜†

    The approach above is different to what’s in the notes and it means that you do not have to remember that complicated formula. I haven’t discounted the inflows: I’ve compounded them forward to the end of the project to see what we would end up in cash if all receipts were deposited at 10% as soon as received.

    The process gives you just two cash flows: the PV of expenditure and the amount in the bank at the end of the project if receipts are immediately deposited. From those two flows, the MIRR can be worked out as shown above.

    November 27, 2014 at 10:06 am #213708
    atab
    Member
    • Topics: 82
    • Replies: 185
    • β˜†β˜†β˜†

    Ok thanks for your help! πŸ™‚

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