- This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.
- December 3, 2020 at 4:57 am #597444Noah098Member
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sir from your lectures and my own understanding i have understood that MIRR is the return that an entity gets if proceeds are reinvested at cost of capital. However, isn’t the cost of capital a company’s borrowing rate? So then are we assuming that company’s cost of capital, or in other words its borrowing rate is same as its deposit rate?
Better still why can’t we just use risk free rate to find out company’s MIRR, as in assume that the reinvestment rate would be at risk-free rate? this although will give us a conservative MIRR, but its obviously better than overestimating the MIRR and taking up the project assuming that reinvestment rate would be same WACC( deposit rate in my opinion would be less than WACC).December 3, 2020 at 10:26 am #597478John MoffatKeymaster
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The MIRR is really just a way of arriving at a measure that can be used in the same way as the IRR but that will always arrive at the same decision when comparing investments as does choosing the one with the highest NPV.
Although standardly we take about the assumption regarding reinvestment, it is actually meaning that the returns are used to pay of borrowings and therefore save interest at the cost of capital.
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