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In: Finance

How to calculate NPV, IRR, MIRR, and Ordinary Payback? Example please

How to calculate NPV, IRR, MIRR, and Ordinary Payback? Example please

Solutions

Expert Solution

(1) NPV is the difference between present values of the positive cash flows and negative cash flows, discounted at the required rate of return. It can be calculated using NPV function of Excel or as the sum of discounted values of all cash flows; Example as follows:

Note: When NPV function is used, Values inputed should be from period 1 (and not period 0). Value of period 0 should then be added/ subtracted from the function result.

(2) IRR is the rate of return with which the present values of future cash flows will be equal to the amount of investment (Cash outflow). This needs iteration. However, can be calculated easily using the IRR function of Excel by inputting the cash flows as values, as follows:

(3) MIRR is calculated as the nth  Root of Future Values of positive cash flows divided by Sum of Present Values of negative cash flows and reduced by 1. n stands for the number of equal periods of the cash flows. Positive cash flows are applied with reinvestment rate for ascertaining the Future Value. Negative Cash flows are discounted with finance rate as discount rate.

This can be calculated using the MIRR function of Excel as follows:

Ordinary Pay back period is the time required to get the amount of investment fully repaid by the revenues generated by the project periodically. This can be calculated by simply deducting the net cash flow every year, from the amount of investment sequentially as follows:


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