Topic №11: Evaluation of financial and economic efficiency of investment projects

Formula for calculating the modified internal rate of return (MIRR):
MIRR - modified internal rate of return;
CFt - cash inflow in the period t = 1, 2, ... n;
It - cash outflow in the period t = 0, 1, 2, ... n;
r - the barrier rate (discount rate);
d - level of reinvestments (interest rate based on possible income from reinvestment of received positive cash flows or rate of return on reinvestments);
n - the number of periods.
Example No. 1. Calculation of MIRR.
Investments $ 115,000.
Income from investments in the first year: $ 32,000;
in the second year: $ 41,000;
in the third year: $ 43,750;
in the fourth year: $ 38,250.
Reinvestment rate - 6.6%
(1 + MIRR)^4 = (32000 * (1 + 0.066)^ 3 + 41000 * (1 + 0.066)^2 + 43750 * (1 + 0.066) + 38250) /
/ (115000/1) = 170241.48 / 115000 = 1.48036
MIRR = 10.304%.
Answer: the modified internal rate of return is 10.304%, which is more than the reinvestment rate (6.6%), which means that the project can be implemented.
Example No. 2. MIRR at a variable barrier rate and reinvestment rate.
Investments $ 12800.
Income from investments in the first year: $ 7360;
in the second year: $ 5185;
in the third year: $ 6,270.
The barrier rate is 8.8%.
The reinvestment rate is 7.125% in the second year;
5.334% in the third year.
Define a modified internal rate of return for an investment project.
Cash flow is generated at the end of the period, so when calculating the cumulative cost of cash inflows (NTV), interest begins from the second year (the first period is over, we received money and then we begin to accrue interest on them in accordance with the level of reinvestment )
(1 + MIRR)^3 = (7360 * (1 + 0.07125) * (1 + 0.05334) + 5185 * (1 + 0.05334) + 6270) / (12800 / (1 + 0.088) 0) = 20036.5217 / 12800 = 1.56535326
Hence, MIRR = 16.11031%.
Answer: the modified internal rate of return is 16.11%, which is more than the barrier rate (8.8%), which means that the project can be implemented.