a) Calculate MIRR figures for the open-cast and deep-mine methods.
b) Discuss the use of MIRR to evaluate the two options available to CAMC.
6 MIRR reinvestment assumption Taking the example in table 2 to calculate MIRR using a cost of capital of 10 per cent: Balance at end of year 5 (cost of Year Cash flow capital: 10%) 1 9,000 [pounds 13,177 ie, 9,000 [pounds sterling] sterling] [pounds x [1.
The mathematical relationship between the MIRR as arrived at in my article (there are other variations to its calculation) and the MGR is (1 +MIRR)=(1 +MGR)x (I + cost of capital).
I refer readers to my earlier articles in Management Accounting (January 1997, October 1998 and June 1999), which look at the four measures of NPV, IRR, MIRR and MGR.
The difference between the MIRR figure in table 2 and the one you derived is a result of an interpolation between two values from tables.
If, as may well be the ease in exceptional circumstances, a reinvestment rate is greater than the company's cost of capital, then the MIRR will underestimate a project's true rate of return.
CALCULATION OF THE MIRR Year Cash flow (f) 0 585,000 The net cash flows from the project for years one to 10 are compounded at the same rate as the cost of capital (8 per cent in this case) into a single figure for year 10.