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Section 13: Investment Analysis 149
File name: hp 12c_user's guide_English_HDPMBF12E44 Page: 149 of 209
Printered Date: 2005/7/29 Dimension: 14.8 cm x 21 cm
This Modified Internal Rate of Return procedure (MIRR) is one of several IRR
alternatives which avoids the drawbacks of the traditional IRR technique. The
procedure eliminates the sign change problem and the reinvestment (or
discounting) assumption by utilizing user stipulated reinvestment and borrowing
rates.
Negative cash flows are discounted at a safe rate that reflects the return on an
investment in a liquid account. The figure generally used is a short-term security
(T-Bill) or bank passbook rate.
Positive cash flows are reinvested at a reinvestment rate which reflects the return on
an investment of comparable risk. An average return rate on recent market
investments might be used.
The steps in the procedure are:
1. Calculate the future value of the positive cash flows (NFV) at the reinvestment
rate.
2. Calculate the present value of the negative cash flows (NPV) at the safe rate.
3. Knowing n, PV, and FV, solve for i.
Example:
An investor has the following unconventional investment opportunity.
The cash flows are:
Group # of Months Cash Flow ($)
0 1 –180,000
1 5 100,000
2 5 –100,000
3 9 0
4 1 200,000
Calculate the MIRR using a safe rate of 6% and a reinvestment (risk) rate of 10%.
Keystrokes Display
fCLEARH
0.00
0gJ
0.00
First cash flow.
100000gK
5ga
5.00
Second through sixth cash flows.
0gK5ga
5.00
Next five cash flows.
0gK9ga
9.00
Next nine cash flows.
200000gK
200,000.00
Last cash flow.
149


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