MIRR Combination Approach Calculator

MIRR Formula:

\[ MIRR = \left(\frac{FV_p}{PV_n}\right)^{\frac{1}{n}} - 1 \]

Modified Internal Rate of Return (MIRR):

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1. What is the MIRR Combination Approach Calculator?

Definition: This calculator computes the Modified Internal Rate of Return (MIRR) using the combination approach, which considers both the cost of investment and the interest received on reinvestment of cash.

Purpose: It provides a more accurate measure of an investment's attractiveness than IRR by assuming reinvestment at the firm's cost of capital.

2. How Does the Calculator Work?

The calculator uses the formula:

\[ MIRR = \left(\frac{FV_p}{PV_n}\right)^{\frac{1}{n}} - 1 \]

Where:

\( MIRR \) — Modified internal rate of return (decimal)
\( FV_p \) — Future value of positive cash flows (USD)
\( PV_n \) — Present value of negative cash flows (USD)
\( n \) — Number of periods (dimensionless)

Explanation: The formula calculates the interest rate that equates the present value of cash outflows with the future value of cash inflows.

3. Importance of MIRR Calculation

Details: MIRR provides a better indication of a project's profitability and efficiency than IRR by eliminating the multiple IRR problem and providing a more realistic reinvestment rate assumption.

4. Using the Calculator

Tips: Enter the future value of positive cash flows, present value of negative cash flows, and number of periods. All values must be > 0.

5. Frequently Asked Questions (FAQ)

Q1: How is MIRR different from IRR?
A: MIRR assumes reinvestment at the firm's reinvestment rate rather than the project's IRR, providing a more realistic measure.

Q2: What's considered a good MIRR value?
A: Generally, an MIRR higher than the company's cost of capital indicates a good investment.

Q3: When should I use the combination approach?
A: Use this approach when you have separate financing and reinvestment rates for your cash flows.

Q4: How do I calculate FV_p and PV_n?
A: FV_p is the sum of all positive cash flows compounded at the reinvestment rate. PV_n is the sum of all negative cash flows discounted at the finance rate.

Q5: Can MIRR be negative?
A: Yes, a negative MIRR indicates the project's cost exceeds its returns when considering the reinvestment rate.