the difference between the internal rate of return method and the modified internal

Expert Solution

Internal rate of Return (IRR) is the rate at which present value of all future cash inflows equals to the present value of outflow. IRR method assume that future cash flow reinvested at the same rate, However, this is not possible in practical world and thus Modified internal rate of return (MIRR) introduced to overcame the drawback of IRR.

In MIRR method, Firstly we calculate the Future value of Cash Inflows on project expiry date at available reinvestment rate and the rate at which present value of above terminal value(cash inflows) equals to present value of the Cash out flows is known as MIRR.

IRR can be calculated with following equation -

Where,

r = Internal rate of Return

CF = Periodic cash inflows

MIRR can be calculated in following manner -

Firstly calculate Terminal value(Future value at end of project) of cash inflows.

Where,

i = reinvestment rate of return

Use below equation to calculate MIRR

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.

jeff jeffy answered 5 months ago

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