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Hi,
I am working out a question from June 2006 called GWCC and in it there is a MIRR calculation. As far as I know the MIRR calculation is:
(PVr / PVi) 1/n (1 + re) – 1
However, in this question the examiner has worked it out as:
(PVr / PVi) 1/n – 1
Obviously, I come to different answers using these two different calculations.
Is there any reason why this might have been used? Which is the correct one please?
Thanks!
I don’t use a formula and I don’t think they help understanding. Instead, discount all cash outflows back the time 0; project all cash inflows through to the end of the project. That gives one outflow, one inflow that can give the IRR.
Year 0 1 2 3 4
Cash flow ($) (5,000) 2,000 (1,000) 3,500 3,800
The cost of capital is 10%.x1.1^3 x x 1.1^1
Year 4 values 2,662 + 3,850 + 3,800 = 10,312
Year 0 values 5,000 1000/1.1^2 = 5,826
At IRR:
5,826 = 10,312 x 4 yr D/c factor
4 yr d/c factor = 0.5649 = 1/(1 + r)4
(1 + r)4 = 1.77 ; 1 + r = 1.77^ ¼ = 1.15; so 15%
What do you mean by discounting outflows back to time 0 please?
Also, once you have one outflow and one inflow, what is the calculation to arrive at the MIRR please?
That’s just normal discounting
At IRR the PV of inflows = the PV of outflows. See the last 4 lines of the calculation above.
Hmm I can’t seem to understand this method you used. Is there not a standard formula like IRR please?
You treat the MIRR as the IRR.
There is a formula, but it would not necessarily be provided and it is very complicated.
Don’t get fixated on MIRR.
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one of the ways of calculating MIRR is using the termional values of positive cashflows aginst the negative cashflows of negative flows …..same as what the tutor has said reinvesting the profits and getting the pv of negative flows then all that divided by the investment period minus 1……
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