IRR / MIRR and Perpetuity
 

Hello,

I'd like to calculatet the MIRR of an investment, but am a bit confused:

I have the intial outlay in year 0, and the subsequent cashflows for the
next 10 years.... What about the cashflows for the years beyond the 10th?


Thanks

Answer: IRR / MIRR and Perpetuity
 

Modified Internal Rate of Return (MIRR)
- Consider only cash flows during investment period (year 0 and next 10 years)
- Takes into account cost of financing and assumes reinvestment of cash flows at firm's cost of capital
- Assumes cash flows received after investment period ends will also be reinvested at cost of capital

To calculate the present value of cash flows beyond the 10th year, use the perpetuity formula:

1. PV = C / r

Where PV is the present value, C is the cash flow, and r is the discount rate. Use the cash flow that occurs after the 10th year and the cost of capital as the discount rate.

IRR / MIRR and Perpetuity
 

The MIRR will not make any projections. Given a finite set of cash
flows it will tell you what the IRR is for the specific set of cash
flows.

Does this help?
Kostis Vezerides


JEFF wrote:
Hello,

I'd like to calculatet the MIRR of an investment, but am a bit confused:

I have the intial outlay in year 0, and the subsequent cashflows for the
next 10 years.... What about the cashflows for the years beyond the 10th?


Thanks

IRR / MIRR and Perpetuity
 

Are you saying it won't work for a perpetuity? If so, how I do I calculate
the IRR for a very long-term investment without creating the individual
cash-flows?

Thanks.

"vezerid" wrote:

The MIRR will not make any projections. Given a finite set of cash
flows it will tell you what the IRR is for the specific set of cash
flows.

Does this help?
Kostis Vezerides


JEFF wrote:
Hello,

I'd like to calculatet the MIRR of an investment, but am a bit confused:

I have the intial outlay in year 0, and the subsequent cashflows for the
next 10 years.... What about the cashflows for the years beyond the 10th?


Thanks

IRR / MIRR and Perpetuity
 

Yes, we're saying it won't work for a perpetuity. There has to be a finite
number of cash flows for IRR to calculate the return.

If your cash flow is level forever, the IRR is simply:

=CashFlow/InitialInvestment

--
Regards,
Fred


"JEFF" wrote in message
...
Are you saying it won't work for a perpetuity? If so, how I do I calculate
the IRR for a very long-term investment without creating the individual
cash-flows?

Thanks.

"vezerid" wrote:

The MIRR will not make any projections. Given a finite set of cash
flows it will tell you what the IRR is for the specific set of cash
flows.

Does this help?
Kostis Vezerides


JEFF wrote:
Hello,

I'd like to calculatet the MIRR of an investment, but am a bit confused:

I have the intial outlay in year 0, and the subsequent cashflows for the
next 10 years.... What about the cashflows for the years beyond the 10th?


Thanks

IRR / MIRR and Perpetuity
 

Fred Smith wrote...
Yes, we're saying it won't work for a perpetuity. There has to be a finite
number of cash flows for IRR to calculate the return.

If your cash flow is level forever, the IRR is simply:

=CashFlow/InitialInvestment
....

IRR alone won't work for a perpetual cashflow, but it'd work nicely for
daily b70hxg1

IRR / MIRR and Perpetuity
 

Interesting response.....

I'm trying to marry the cashflows for year 0-10, with a perpetuity for the
beyond 10.... Sounds like I'm missing something.

"Harlan Grove" wrote:

Fred Smith wrote...
Yes, we're saying it won't work for a perpetuity. There has to be a finite
number of cash flows for IRR to calculate the return.

If your cash flow is level forever, the IRR is simply:

=CashFlow/InitialInvestment
....

IRR alone won't work for a perpetual cashflow, but it'd work nicely for
daily b70hxg1

IRR / MIRR and Perpetuity
 

Fred Smith wrote...
Yes, we're saying it won't work for a perpetuity. There has to be a finite
number of cash flows for IRR to calculate the return.

If your cash flow is level forever, the IRR is simply:

=CashFlow/InitialInvestment
....

Let's try that again.

Excel's IRR function breaks down for very long cashflows. However,
there's always Solver to find the interest rate at which the NPV
function returns zero. That said, arbitrarily long cashflows become
pure guesswork after some finite point - 5 years, 10 years, 50 years.
After that, if the cashflows were based on a constant arithmetic or
geometric progression, it's possible to calculate the PV at the time
that progression begins based in interest rate i. Add that term to the
NPV term, also using i, then use Solver to set the whole thing to zero
by varying i.

IRR / MIRR and Perpetuity
 

JEFF wrote...
....
I'm trying to marry the cashflows for year 0-10, with a perpetuity for the
beyond 10.... Sounds like I'm missing something.
....

Use Solver. With 0-10 cashflows in a range named CF, a constant
perpetuity cashflow named P, and a cell named i holding the interest
rate, enter the formula

=NPV(i,CF)+P/i/(1+i)^10

Then use Solver to set this formula to zero by varying i.