Concept explainers
Net present value is the difference between the present values of
Calculate the cost of
Decision rule:
IRR:
IRR is also called as
Decision for IRR rule:
MIRR:
MIRR is also called as modified internal rate of return. Under MIRR cash flows are reinvested at cost of capital. IRR assumes cash flows are reinvested at IRR, which is unrealistic, this was mitigated by the MIRR.
Calculate the MIRR as follows:
Decision for MIRR rule:
Cost of the project is $365,000 and cash inflows are $260,000 in year 1 and $175,000 in year 2. Cost of capital is 13%.
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