Lecture 19 - Capital Budgeting - NPV and Other Criteria (II)

# For project s npv discount flows at 5 while irr

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Unformatted text preview: hem at 14.49%. That means IRR also assume surpluses can be reinvested at 14.49% For L, NPV assumes discounting at 5%, while IRR assumes discounting at 11.79% Since S gets more funds earlier on, the gets more funds earlier on the reinvestment assumption makes a difference But, reinvestment rate should always be the firm’s cost of capital 19-11 Trying to Fix IRR: The Modified IRR (MIRR) Modified IRR (MIRR) Let’s avoid multiple IRRs by eliminating the nonnormal cash flows flows One idea is to discount all negative cash flows to the first period and add them to the initial cost. Using a discount rate of 20%: 0 10% - 1.6 1 2 0 becomes 10 -10 10% 1 -1.6 10 -10/(1+0.2)2 2 0 And we can then solve for a unique IRR: 0 10% -8.5444 1 10 2 0 10 − 8.5444 + = 0 ⇔ MIRR = 0.1704 0 (1 + MIRR ) (1 + MIRR )1...
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