The MIRR calculator is a sophisticated tool designed to offer a more realistic picture of an investment's profitability by incorporating the cost of capital through the WACC. Unlike the traditional Internal Rate of Return (IRR), which can sometimes provide misleading results due to its assumption of reinvesting the cash flows at the IRR itself, MIRR uses a more conservative approach. It assumes that positive cash flows are reinvested at the WACC, offering a more accurate reflection of an investment's potential.
Formula of MIRR Calculator with WACC
To calculate MIRR considering the Weighted Average Cost of Capital, the formula is as follows:
MIRR = (FV / PV)^(1/n) * (1 + WACC)^(n) - 1
Where:
MIRRis the Modified Internal Rate of Return.FVis the future value of the investment's positive cash flows, reinvested at the WACC.PVis the present value of the initial investment's negative cash flows, discounted at the financing cost or WACC.nis the number of periods.WACCis the Weighted Average Cost of Capital. It represents the average rate of return a company is expecte to pay its securities holders to finance its assets.
This formula stands as a testament to blending traditional investment appraisal with contemporary financial insights, offering a more grounded and realistic evaluation of investment projects.
General Terms Table
To aid understanding and facilitate practical applications, below is a table of general terms commonly associate with the MIRR calculator and WACC:
| Term | Definition |
|---|---|
| MIRR | Modified Internal Rate of Return, a measure of the investment's profitability considering the cost of capital. |
| WACC | Weighted Average Cost of Capital, the average rate of return a company expects to compensate its investors. |
| FV | Future Value, the value of an investment at a future date, considering positive cash flows reinvested at the WACC. |
| PV | Present Value, the current value of future cash flows discounted at the WACC. |
| n | Number of periods, typically years, over which the investment is evaluated. |
Example of MIRR Calculator with WACC
To illustrate, consider an investment with an initial outlay of $100,000, expected annual cash flows of $30,000 for 5 years, and a WACC of 10%. By applying the MIRR formula, one can determine the investment's modified internal rate of return, factoring in the cost of capital and providing a more reliable metric for decision-making.
Most Common FAQs
MIRR provides a more realistic estimate of an investment's profitability by assuming reinvestment at the WACC, unlike IRR, which assumes reinvestment at the IRR itself.
WACC is use to reflect the cost of capital, offering a more accurate measure of an investment's returns by considering the financing costs.
MIRR helps investors make more informed decisions by providing a conservative estimate of an investment's profitability, taking into account the cost of capital and reinvestment rates.