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Hello Tutor,
Why in MIRR, we calculate the present value of negative cashflows. What is the logic behind it? Is it that we consider the negative cashflow as a loan taken out?
Thank you.
If carrying out an NPV calculation, all cash flows are discounted to their present values. MIRR seeks to simplify a complex pattern of cash flows to just two: one summarising outflows and one summarising inflows.
Outflows become one outflow a Time 0 by adding together their PVs.
Inflows become one inflow at the terminal time of the project by assuming they can be invested at a given interest rate as received then the terminal amount (receipts plus interest) released at the end of the project.
The MIRR is the IRR of the two summarised flows.
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