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    Modified Internal Rate of Return (MIRR)

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    JaJ08
    The document defines the Modified Internal Rate of Return (MIRR) as the discount rate that sets the present value of a project's costs equal to the present value of its terminal value, where terminal value is the future value of cash inflows compounded at the firm's cost of capital. It then provides an example calculation of MIRR for two projects, X and Y, each with an initial cost of $10,000 and cash flows over 4 years. The MIRR is calculated to be 14.61% for Project X and 13.73% for Project Y. A second example then calculates the MIRR of an investment with a cost of $250,000 and cash flows over 3 years to be

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    Modified Internal Rate of Return (MIRR)

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    JaJ08
    52 views8 pages
    The document defines the Modified Internal Rate of Return (MIRR) as the discount rate that sets the present value of a project's costs equal to the present value of its terminal value, where terminal value is the future value of cash inflows compounded at the firm's cost of capital. It then provides an example calculation of MIRR for two projects, X and Y, each with an initial cost of $10,000 and cash flows over 4 years. The MIRR is calculated to be 14.61% for Project X and 13.73% for Project Y. A second example then calculates the MIRR of an investment with a cost of $250,000 and cash flows over 3 years to be

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    The document defines the Modified Internal Rate of Return (MIRR) as the discount rate that sets the present value of a project's costs equal to the present value of its terminal value, where terminal value is the future value of cash inflows compounded at the firm's cost of capital. It then provides an example calculation of MIRR for two projects, X and Y, each with an initial cost of $10,000 and cash flows over 4 years. The MIRR is calculated to be 14.61% for Project X and 13.73% for Project Y. A second example then calculates the MIRR of an investment with a cost of $250,000 and cash flows over 3 years to be

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    52 views8 pages

    Modified Internal Rate of Return (MIRR)

    Uploaded by

    JaJ08
    The document defines the Modified Internal Rate of Return (MIRR) as the discount rate that sets the present value of a project's costs equal to the present value of its terminal value, where terminal value is the future value of cash inflows compounded at the firm's cost of capital. It then provides an example calculation of MIRR for two projects, X and Y, each with an initial cost of $10,000 and cash flows over 4 years. The MIRR is calculated to be 14.61% for Project X and 13.73% for Project Y. A second example then calculates the MIRR of an investment with a cost of $250,000 and cash flows over 3 years to be

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    Modified Internal Rate

    of Return (MIRR)
    The discount rate at which the present value of
    a project’s cost is equal to the present value of its
    terminal value, where the terminal value is found as
    the sum of the future values of the cash inflows,
    compounded at the firm’s cost of capital.
    You must analyze two projects, X and Y. Each
    project costs $10,000, and the firm’s WACC is 12%.
    The expected cash flows are as follows:

    Project X Project Y
    Year Cash Flows Year Cash Flows
    0 (10,000) 0 (10,000)
    1 6500 1 3500
    2 3000 2 3500
    3 3000 3 3500
    4 1000 4 3500

    Calculate each project’s MIRR.


    Given:
    WACC = 12%
    n = 4 years
    Project Cost = -10000

    Solution:

    Step 1: Calculate the Terminal Value (TV).


    Formula: A = P(1+WACC)n

    TVx = $6500(1.12)3 + 3000(1.12)2 + 3000(1.12)1 + 1000 = $17,255.23


    TVy = $3500(1.12)3 + 3500(1.12)2 + 3500(1.12)1 + 3500 = $ 16,727.65
    Step 2: Calculate the MIRR.
    𝑛 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
    Formula: MIRR = −1
    𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠

    4 $17,255.23
    MIRRx = -1
    $10,000
    = 14.61%

    4 $16,727.65
    MIRRy = -1
    $10,000
    = 13.73%
    Mr. A is considering an investment of $ 250,000 in a startup.
    The cost of capital of the investment is 13%. Following cash
    flows are expected:

    Year Cash Flows


    0 ($250,000)
    1 50,000
    2 100,000
    3 200,000

    Calculate MIRR for the proposed investment.


    Given:
    WACC = 13%
    n = 3 years
    Project Cost = -250,000

    Solution:
    Step 1: Calculate the Terminal Value (TV)
    Formula: A = P(1+WACC)n

    Cash Duration Rate Working Terminal


    Inflow Value
    50000 2 years 13% (50000 × 1.132) $63,845
    100000 1 year 13% (100000 × 1.13) 113,000
    200000 0 year 13% 200,000
    $376,845
    Step 2: Calculate the MIRR.
    𝑛 𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝐼𝑛𝑓𝑙𝑜𝑤𝑠
    Formula: MIRR = −1
    𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐶𝑎𝑠ℎ 𝑂𝑢𝑡𝑓𝑙𝑜𝑤𝑠

    $376,845
    MIRR = 3 -1
    $250,000
    = 14.66%
    The End…
    Thank You!

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