MIRR and IRR
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I am an investor in a company. We are considering a project which involves opening a new store at a cost of $10,000,000 at t = 0. The project is expected to have operating cash flows of $5,000,000 at the end of each of the next 4 years. However, the facility will have to be repaired at a cost of $6,000,000 at the end of the second year. Thus, at the end of Year 2 there will be a $5,000,000 operating cash inflow and an outflow of -$6,000,000 for repairs. The company's cost of capital is 15 percent. What is the difference between the project's MIRR and its regular IRR?
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Solution Summary
The solution explains how to calculate the MIRR and IRR for a project.
Solution Preview
The first thing to do is to put down the cash flows.
Year 0 Cash outflow = -10,000,000
Year 1 Cash inflow = 5,000,000
Year 2 Cash inflow = 5,000,000 and cash outflow = 6,000,000 and so the net in -1,000,000
Year 3 Cash inflow = 5,000,000
Year 4 Cash inflow = 5,000,000
We can use excel to calculate the IRR and MIRR and find the difference. Using excel the IRR comes to 13.78% and MIRR comes to 14.29% and the difference is 0.51%.
If you wish to do manually
IRR is the rate that will make the PV of cash flows equal ...
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