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MIRR is not recommended when selecting among mutually exclusive alternatives because the values of differing investment sizes are not considered (i.e., an investor will choose to invest more in an alternative with more favorable returns). This shortcoming may be corrected by applying MIRR on an incremental basis. BecauseMIRRwillprovidetheproperrankingofprojectstobeselectedtomaximizetotalreturn given a limited budget, Ml[RJ3 is recommended when ranking alternatives. Discussion The formulaz5for calculating an MIRR is as follows: MIRR = solution for r in the following equation: Where: Fn, = net negative cash flows at time n MIRR = r, where c n=o (1 + (I)" n=o (1 -I-r)N (4-16) MIRR = r, modified internal rate of return = netpositivecashflowsat men d = rate of return of reinvestment N = life of investment. FPll N Erin =cNFp,(l+d)N-n Recall that the IRR of the after-tax cash flows in the example fkom the Internal Rate of Return subsection was 61%. Remember that IRR assumes that dl interim cash flows are reinvested at the IRR-in this case 61%. As an example of MIRR, assume that dl interim cash flows are instead reinvested at 12%. Table 4-12 illustrates the application of MIRR versus IRR. Year 2 3 4 5 IRR I MIRR Table 4-12. After-Tax Cash Flows 6,558 6,223 6,087 6,259 61.2% MlRR versus IRR Future Value in Year 5 9,214 7,806 8,817 6,259 Cash Flow for MlRR 41,542 32.9% 251nthe formula provided here the present value of negative cash flows and the future value of positive cashflowsarecalculatedusingtheminimumrateofreturn. Insomecases,differentratesareusedwhen performing these calculations. 55PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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