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#1
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MIRR Function sensitivity to Finance Rate
Hi all, i was trying to check the sensitivity of the MIRR function to changes
in the frate. The equation uses input like this: =MIRR(values,frate,rrate) where the values are the cash flows, the frate is the finance rate for the capital, and the rrate is the re-investment rate of the return cash flows. I changed the frate (also called cost of capital) from one percent (.01) to a rediculous 90% (.9) and the answer (MIRR) didn't change. Does anybody know enough about the formula or function that could explain this? In the help file, you can see where frate is used, but changing it, or even leaving it out, doesn't change the answer. So the question is...is there a bug in the implementation of the MIRR formula, or is it supposed to do that, and why? thanks! SongBear |
#2
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There is a formula and example in HELP for MIRR. Unfortunately, Help
does not relate the example to the formula, and I have not managed to reproduce the MIRR results from that formula. The formula also seems to be unaffected by the frate in that example. As best I can tell, the formula seems to assume that the loan is paid in full after the first period (hence the insensitivity), which seems unreasonable. Perhaps one of the accountants out there will weigh in? Jerry SongBear wrote: Hi all, i was trying to check the sensitivity of the MIRR function to changes in the frate. The equation uses input like this: =MIRR(values,frate,rrate) where the values are the cash flows, the frate is the finance rate for the capital, and the rrate is the re-investment rate of the return cash flows. I changed the frate (also called cost of capital) from one percent (.01) to a rediculous 90% (.9) and the answer (MIRR) didn't change. Does anybody know enough about the formula or function that could explain this? In the help file, you can see where frate is used, but changing it, or even leaving it out, doesn't change the answer. So the question is...is there a bug in the implementation of the MIRR formula, or is it supposed to do that, and why? thanks! SongBear |
#3
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Would be curious if anyone in this thread ever found an answer. I suspect
there is none, because the MIRR formula appears flawed. I'm an accountant and I can tell you there is no explanation for why the finance rate doesn't impact this formula. I can't find any literature online to specify how one should evaluate IRR when the full cost of an investment is financed with debt. I suspect you have to run an IRR assuming you paid cash up front, and run an IRR separately on the debt, and net the two. "Jerry W. Lewis" wrote: There is a formula and example in HELP for MIRR. Unfortunately, Help does not relate the example to the formula, and I have not managed to reproduce the MIRR results from that formula. The formula also seems to be unaffected by the frate in that example. As best I can tell, the formula seems to assume that the loan is paid in full after the first period (hence the insensitivity), which seems unreasonable. Perhaps one of the accountants out there will weigh in? Jerry SongBear wrote: Hi all, i was trying to check the sensitivity of the MIRR function to changes in the frate. The equation uses input like this: =MIRR(values,frate,rrate) where the values are the cash flows, the frate is the finance rate for the capital, and the rrate is the re-investment rate of the return cash flows. I changed the frate (also called cost of capital) from one percent (.01) to a rediculous 90% (.9) and the answer (MIRR) didn't change. Does anybody know enough about the formula or function that could explain this? In the help file, you can see where frate is used, but changing it, or even leaving it out, doesn't change the answer. So the question is...is there a bug in the implementation of the MIRR formula, or is it supposed to do that, and why? thanks! SongBear |
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