Capital Budgeting Basics#3

# 81 vs 152 pb 10000 dpb 2 22384117 254 vs 208 pb 13000

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@ \$ 7000, DPB  = 1  +  3316/4078  = 1.81 vs.   1.52 (PB) @ \$ 10,000, DPB = 2 + 2238/4117  = 2.54 vs.   2.08 (PB) @ \$ 13,000, DPB = 3 + 1121/4381  = 3.26 vs.   2.57 (PB) 4

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Modified IRR (MIRR) Eliminate multiple sign changes 3 text methods—use  Discounting Approach Discount Future (-) CFs @ required rate Solve for IRR With only one sign change—one IRR 5
MIRR Issues Discount rate is “external” not internal Creates a CF which does not exist If we have right rate, why not use NPV? 3 methods result in 3 MIRRs—which is right? 6

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MIRR Problem Discount Year 5 CF (-\$5100) to Year 0 and combine  negative CFs PV of -5100 in Year 5 @ 10% = -\$3166.70 Year      Cash Flow   0                           -\$16000 becomes -19167   1                               6100   2                               7800        MIRR  =  18.18%    3                               8400   4                               6500        IRR (w/o)  = 21.67*    5      -5100 becomes 0 7
• Spring '09
• SA'EED
• crossover rate, DPB

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