Question

When NPV and IRR rules result in a conflicting decision regarding acceptance of a project managers could use the MIRR.

It assumes reinvestment of projects' cash flows at the WACC, so it produces results consistent with NPV method.

Let's try to find the MIRR for the project with the following cash flows:

Initial cost of -800 at time zero, CF1 = 400, CF 2 = 570, CF3 = -130.

Here we have two negative cash flows and two positive cash flows.

Step 1: find PV of two costs at the discount rate = WACC of 7%;

Step 2 : find FV of two inflows at 7%;

Step 3: find the discount rate that makes PV from step 1 equal to FV from step 2. That is MIRR.

Make a decision on accepting or rejecting the project by comparing MIRR to the WACC.

Answer 1

When there is sign change of chasflows for more than once, there will be more than one IRR which is misleading and contradicting with NPV method. Hence, MIRR Ussed.

Year	0	1	2	3
Cashflow	-800	400	570	-130
WACC	7%
PV of all (-) CF at 0	-906.119
-800 - 130 /(1+0.07)^3
FV of all(+) CF at t=3	1067.86
400*(1.07)^2+570*(1.07)
Lets assume MIRR	5.63%
906.119 X(1+MIRR)^3 = 1067.86

Since, MIRR is < WACC, hence, it si not generating cash enough rate by which we have borrowed cash from outside. Hence, Project should be rejected.