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In the return phase of the project, following are the discounted pv of cash flows: Initial investment in year 0 was 800
1: (1000)
2: 2000
3: 2000
4: 2000Pv of return phase is 6000 or 5000 please?
This is a very odd question and not the sort of question that occurs in Paper AFM.
However given that the question specifically says that these flows are in the return phase, the total PV of them is 5,000. (Had it not said that then the flow at time 1 would be regarded as being part of the investment phase, and so the PV of the return phase would be 6,000).
hmm but this sort of scenario is very practical ,investment occuring loss in the first year, even though i understand the exam practicality
Thank you
Yes, there is often obviously an investment at time 1 as well as at time 0, and normally both are regarded as being the investment phase. Once we start getting inflows, then we have the return phase. That is not just practical – that is what happens in the exam.
What makes the wording of the question you typed strange is that it specifically says that all the flows listed are part of the return phase. If you were told that in the exam then obviously you follow instructions. However Paper AFM questions are not worded like that at all and it is up to you to identify the investment phase and the return phase.
Have you watched my free lectures on MIRR which explain both the purpose and the approach to exam questions on this?
i gathered that from the textbook that its rational that funds are redeployed at cost of capital nor irr rate hence didnt watch the lecture
And I assume that the textbook also made it clear that the reason for calculating the MIRR is that although using the normal IRR is fine when deciding simply whether to accept or reject a project, there can be problems when choosing between projects. Using the MIRR when choosing between projects will automatically give the same decision as would choosing the project with the highest NPV.
I do explain all this in my free lectures.
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