Example of MIRR calculation.

Question:
John Modise has an opportunity to invest in a construction company. The company foresees the
following cash flows (in thousands of rands) during the next four years.

Money can be borrowed at 15% per year while an investment, can earn 18% interest per year in a high-
risk development. Considering the MIRR criterion, what advice will you give him in connection with his
possible investment.

Solution:
Asked is to calculate the MIRR for the investment and thus we make use of the MIRR formula:

The formula consists of the future value of the cash inflows (C) and the present values of the
cash outflows (PVout).

Drawing the time line:

R100 R400 R400

0 1 2 3 4 years

–R200 –R200

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The calculation consists of three steps.

Step 1:
First, we need to determine the present value (PVout) of the cash outflows. The present value of
the cash outflows is the present value of all the negative cash flows. As we need to determine the
present value it means we must first move each outflow to the beginning of the investment
namely, year 0. Secondly, we add the values at the period now together to determine the total
present value of all the outflows.

The present value is calculated using

Now there are two cash outflows, namely R200 at year zero or now and R200 at year two. To
calculate the present value we need to move the R200 at year two, back from year two to year
zero and the R200 at the time now, is already at year zero or now, and does not need to be
moved.

A time line demonstrating it is:

0 1 2 3 4years

–R200 –R200

2 years

Thus the R200 moves back two years in time and the other R200 doesn’t move anywhere. We
make use of the rate at which money can be borrowed, namely 15% to move the money back in
time. Thus

The present value of the cash outflows is R351,23.

NOTE: We make use of the rate at which money can be borrowed if we are working with
the cash outflows, as we assume the worst scenario that the money was borrowed.

Step 2:
Secondly, we need to determine the future value (C) of the cash inflows. The future value of
the cash inflows is the future value of all the positive cash flows. As we need to determine the

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future value it means we must move each inflow to the end of the investment namely, year
four, and then add them together to determine the total future value of all the inflows.

The future value is calculated using

Now there are three cash inflows, namely R100 at year one, R400 at year three, and R400 at year
four. To calculate the future value we need to move the R100 forward from year one to year four,
the R400 from three to year four, and the R400 at year four, is already at year four, and does not
need to be moved.

A time line demonstrating it is:

3 years

1 year

R100 R400 R400

0 1 2 3 4 years

–R200 –R200

Thus the R100 moves from year one to year four, thus three years forward in time, the
R400 moves from year three to year four, thus one year forward and the R400 at year four stays
at year four. We make use of the rate at which money can be invested in namely 17,5%, as we
take it that we would invest the inflows of money.

The future value of the inflows is R1036,30.

NOTE: We make use of the rate at which money can be invested if we are working with the
cash inflows, as we assume the best scenario that the money will be invested.

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Step 3:
Lastly, we calculate the MIRR.

The total number of years of the investment is four years thus n = 4.

The MIRR of the company is 31,06%. Because, the MIRR of 31,06% is larger than the
compound interest rate of 18%, he will earn more by investing in the Construction Company
than leaving the money in the bank.