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Hi John,
When calculating IRR, is it necessary that the lower NPV used is <0? Or just to use any 2 NPVs, and the 2 associated interest rates, in the interpolation formula? I had always thought (perhaps heard initially) to make sure to use one NPV <0 and one >0 in the interpolation formula, but the BPP text book just says to use any 2 “reasonable” rates (i.e. not hundred miles away from each other as would lose accuracy) & associated NPVs.
Re MIRR, is the “Return Phase” considered to begin once cashflows are net positive, or just once any cash in-flows occur (i.e. usually Y1 and beyond)? We could have scenario where Y1 is still net-negative despite some in-flows (as still making investments too which outweigh the returns). The BPP textbook indicates Return Phase to begin from Y1 (even if cashflows still net-negative) but a lecturer I had before said it only begins once cashflows are net-positive in a year (could be Y2 or 3, etc). Or is there no strict rule? Can’t seem to find definitive online.
Thanks again..
For the IRR, any two rates can be used. One positive NPV and one negative NPV will give a better approximation, but it is not essential. I do explain this in my lectures.
For MIRR, the return phase starts when cash inflow start (even if there happens to be a cash outflow later).
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