22. Modified IRR (S5.3) Look again at the project cash flows in Problem 7. Calculate the modified IRR (MIRR) as defined in footnote 4 in Section 5-3. Assume the cost of capital is 12%.

Now try the following variation on the MIRR concept. Figure out the fraction x such that x times C1 and C2 has the same present value as (minus) C3.

x C 1  +  _1x_. C1_ 22_   = − __ C_ 3_ _ 1. 12 2 Define the modified project IRR as the solution of C 0  +  _ (11_  _+−_  I_xR_) C_R_ 1   +  _(_1_ −__ x_)_ C_ 2_

(1 + IRR) 2

 = 0 Now you have two MIRRs. Which is more meaningful? If you can’t decide, what do you conclude about the usefulness of MIRRs?

Chapter 5 Net Present Value and Other Investment Criteria 145