MIRR calculation

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%

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%

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.