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A Note On The Financial Evaluation Of Projects

            

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NET PRESENT VALUE Contd..

The following examples demonstrate the calculation of MIRR.

Example I

Pentagon Limited is evaluating a project that has the following cash flows:

YEAR  0 1 2 3 4 5 6
Cash flow (Rs. in million) -120 
-80 20 60 80 100 120

The cost of capital for Pentagon is 15 percent. The present value of costs is:

120 + 80/(1+0.15) = 189.6

The terminal value of cash inflows is:

20(1.15)4 + 60(1.15)3 + 80(1.15)2 + 100(1.15)1+ 120

= 34.98 + 91.26 + 105.76 + 115 + 120 = 467

The MIRR is obtained as follows:

189.6 = 467/(1+MIRR)6

(1+MIRR)6 = 2.463

1 + MIRR = (2.463)1/6 = 1.162

MIRR = 0.162 = 16.2%


Example II

Calculate the MIRR for projects C and D, which have an initial investment of Rs 1,000,000 and Rs 150,000 respectively. The cost of capital is 10%.

Project C Project D
End of year  Cash flows  Future value of cash flows at the end of 5th year  Cash flows  Future value of cash flows at the end of 5th year
1  Rs 250000  366025  Rs 65000  95167
2  Rs 250000  332750  Rs 65000  86515
3  Rs 250000  302500  Rs 65000  78650
4  Rs 250000  275000  Rs 65000  71500
5  Rs 250000  250000  Rs 65000  65000
Total    Rs 1526275    Rs 396832


More...

APPRAISAL TECHNIQUES IN PRACTICE FOR VARIOUS TYPES OF PROJECTS

CONCLUSION

EXHIBIT I ASPECTS OF PROJECT APPRAISAL

EXHIBIT II PROJECT EVALUATION TECHNIQUES

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