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1. when cost of debt is not given in reedemable debt we calculate IRR, we do guess and calculated IRR.
So in MIRR formula the cost of capital is the IRR we calculated for the project or what is it as we re-invest the proceeds at the cost of capital? please explain
2. MIRR is usually lower than the IRR, because it assumes that the proceeds are re-invested at the cost of capital
If you are ever required to calculate the cost of redeemable debt then we calculate the IRR of the after-tax flows (and appreciate that rather than make two guesses you can use the IRR function in the spreadsheet provided in the exam).
The MIRR is only really of any relevance if we are choosing between 2 investments.
Suppose an investment requires an outlay of $1,000, has an IRR of 10% and lasts for 20 years. Another investment also required an outlay of $1,000, has an IRR of 12% but only lasts for 4 years.
The first investment would almost certainly have the highest NPV and is the one we would choose. We would not choose the one with the highest IRR – we would rather get 10% for 20 years than 12% for only 4 years.
The only time it would be better to choose the second one would be if with both investments we could invest the returns at the IRR in which case both investments would effectively be giving either 10% or 12% for ever. This is not a realistic assumption, and as I explain in my lectures calculating the MIRR is really almost a cheat way of calculating a return where we can compare and end up choosing the one that has the highest NPV.
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