To better understand how MIRR works, let's look at the step-by-step algorithm for calculating it.
All future income is discounted to the completion of the project. In this case, a rate equivalent to the weighted average cost of capital is used: (1 + WACC) + (N - n).
All investments, including costs and negative cash flows, are discounted to the start of the project, using a discount rate of (1 + r) - (n - 1).
MIRR is the rate of return at which the total present 3 phone number identifier philippines alue of all expected receipts at the end of the period equals the total cost of all required expenditures.
mirr
Where:
CF+n — positive cash flows for a specific period;
CF-n — negative cash flows for a specific period;
WACC — weighted average cost of capital;
r — discount rate;
N — total duration of the project;
Σ is a summation symbol used to aggregate all cash flows accumulated to a certain point in time.
Read also!
"Cross-marketing: 5 examples and 8 mistakes"
Read more
Limitations of Using Payback Period Indicators
Payback period is rarely used in corporate finance because it ignores the time value of money. This simplifies calculations, but reduces the accuracy of the evaluation of investment projects, especially long-term ones.
In reality, identical amounts of money received by an investor at different points in time are not equivalent. For a correct assessment, future cash flows must be discounted, i.e. reduced to their current value.
Let's look at an example to illustrate. Let's assume that the investment is 1 million rubles, generating an annual income of 500 thousand rubles. At the same time, there is an alternative to a risk-free bank deposit with a yield of 5%. In addition, annual inflation at a minimum of 5% should be taken into account.
As a result, the 500 thousand rubles expected in a year are estimated at 5% lower in current prices, i.e. at 475 thousand rubles. After two years, with a simple calculation without taking into account compound interest, the cost of the payment will decrease by 10%, amounting to 450 thousand rubles. Consequently, the actual payback period of the project will be longer than with the initial calculation without taking into account discounting.
How to achieve multiple growth in traffic and sales from your website?
Alexey Boyarkin
Dmitry Svistunov
Head of SEO and Development
Read more posts on my personal blog:
I have always been concerned about the issue of moving to a fundamentally new level. So that the indicators would grow not by 2 or 3 times, but by several orders of magnitude. From a thousand visits to ten thousand or from ten thousand to a hundred thousand, if we are talking about a website, for example.
And I know that such leaps are always the result of painstaking work in five areas:
Technical condition of the site.
SEO.
Collection of site semantics.
Creating useful content.
Working on conversion.
And at the same time, every manager needs an increase in sales and the number of applications from the site at the moment.
To get this growth, download our step-by-step template for increasing sales from the site:
Download template
Already downloaded
153114
Errors in calculating the project payback period
Even minor errors in the analysis of an investment project can seriously complicate the work of the financial director. In an optimistic scenario, the actual indicators will be significantly lower than predicted.
Errors in calculating the project payback period
Source: shutterstock.com
In a pessimistic scenario, in a few years it may turn out that the project concept was initially unviable and resources were wasted. Let's take a closer look at what miscalculations lead to erroneous decisions and how to avoid them.
Incorrect assumptions
Often, errors in calculating the project's payback period arise already at the investment planning stage. It is necessary to pay attention to a number of inaccuracies that can negatively affect the results of the analysis:
an incomplete list of investments, including erroneous construction estimates and unaccounted for design costs;
incorrect assessment of customs duties and fees (when importing equipment);
incorrect calculation of VAT refunds, as well as the investments themselves, without taking into account VAT or customs duties;
erroneous presentation of all investment costs as one-time (for example, in the first month of project implementation) without taking into account possible deferrals from equipment suppliers, construction and design organizations.