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Sir im finding mirr bit confusing i was going through kaplan i came across this illustration of MIRR alternative calculation which totally confuse me
A project requires an initial investment of $20,000 and will generate annual cash flows as follows:
Year Cash flow $
1 4,000
2 (2,000)
3 6,000
4 7,600
5 10,000The firm’s financing rate (for negative cash flows) is 9%, and its reinvestment rate for positive cash flows is 6%.
What is the MIRR?
SOLUTION
Year Equivalent cash flow at time 0 $ Equivalent cash flow at time 5 $
0 (20,000)
1 4,000 × 1.06^4 = 5,050
2 (2,000) × 1/1.09^2 = (1,683)
3 6,000 × 1.06^2 = 6,742
4 7,600 × 1.06 = 8,056
5 10,000 × 1 = 10,000
(21,683) 29,848(29,84821,6835)^(1/5) –1=6.6%
There are several ways of calculating the IRR, but I have no idea why Kaplan has bothered showing the way you have typed out since it is more sensible to use the formula that is given on the formula sheet.
I show how to use the formula in my free lectures, and if there are two interest rates given (as here) which has never happened in the exam then Re is the formula is the re-investment rate (which here is 6%). You end up with the same answer of 6.6%.
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