MIRR PV of cash flow from investment phase

Ffiredolphin13y ago

Dear Tutor and everyone,

I believe everyone is familiar with the MIRR formulae, just there is one thing I am not sure:the PV of the cash flow from investment phase. what exactly should be included in calculating that?

let me use a example: a project last for 5 years
a) . initial investment of $10000 of machinery at year 0
b) . additional investment $ 6000 of machinery at year 2
c) . scrap value of machinery is $1000 at year 5
d) . capital allowance for year1- 5 are: ($5000),( $4000) ,($3000) ,($2000) ,($1000).
e) . additional working capital for year 0-2 are: $1000,$500,$500
f ) . working capital recovery at year 5 ( $2000)
g) . tax payable for year 1-5 are : $2500,$3000,$3500,$4000,$4500

I know item (a) should definitely be included in PV of cash flow from initial investment phase, could anyone please shed some light on whether any of the other 6 items (b)-(g) should be included as well?

I made all these numbers up myself, so sorry if any of them doesn't make sense.

Thank you in advance!!

Jason

AAQ!13y ago#1

b) yes c) yes d) yes- tax savings only e) yes f) yes and g) will be accounted for in
investment phase....................

Former user13y ago#2

AQ,

I think the Concept of MIRR is get
1.Investment phase cashflows( All negative cashflows into the project before the cash inflows begin) therefore (a and b) Tax savings, subsequent working capital and scrap value should not go into investment phase.

AAQ!13y ago#3

Sorry scrap value and taxes calculations would be in return........WC will be in
investment phase....Yes u may say that any outflow except taxes is ur investment and account for them in investment phase ...............

Ffiredolphin13y ago#4

Hi mtbk,

if that's the concept, shouldn't (b) excluded from investment phase? that occurs in year 2 which is AFTER the cash inflow begins....

and also, WC, should they be included in?

AAnia10y ago#5

Dear Tutor, Can you please reply to the question posted by firedolphin at the top of this page. It is a little bit confusing what needs to be included in the return phase and what should go to an investment phase.. Also, as regards Neptune question that came up in June 2008 reinvestment rate that is used in the MIRR solution is ungeared cost of equity. What is the reason for using ungeared cost of equity and not WACC? Thanking you in advance.

John MoffatTutor10y ago#6

To be honest there are arguments as to which flows should be in which phase when there is an unusual pattern of flows. However as far as the exam is concerned, what mtbk has written above is correct. Ania: The question could perhaps have been worded slightly better, but it is because part (b) follows on from part (a). So in part (a) we have to use the ungeared cost of equity because it is asking for the APV (and then we add on the tax benefit of the financing). Because part (b) then says to ignore the refinancing the examiner intended you just to use the 'first part' of the APV calculation (where we had discounted at the ungeared cost of equity).

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