About the usefulness of MIRRs

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Reference no: EM131061124

Look again at the project cash flows in Problem 10 below. C0 C1 C2 C3 -3,000 3,500 4,000 -4,000 Calculate the modified IRR as defined in Footnote 4 in section 5-3. Assume the cost of capital is 12%. Now try the following variation on the MIRR concept. Figure out the fraction x such that x times C1 and C2 has the same present value as (minus) C3 xC1 + xC2/1.12 = C3/1.22^2 Define the modified project IRR as the solution of C0 + (1-x)C1/1+IRR+ (1-x)C2/(1+IRR)^2/(1+IRR)^2=0 Now you have two MIRRs. Which is more meaningful? If you can’t decide, what do you conclude about the usefulness of MIRRs?

Reference no: EM131061124

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