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    Fin Model Class2 Excel NPV Irr, Mirr Slides

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    Gel vira
    This document summarizes key concepts in financial modeling and capital budgeting techniques. It discusses net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). NPV discounts expected cash flows to determine if a project's value exceeds its costs. IRR is the discount rate that sets NPV to zero. MIRR uses separate rates for reinvesting cash inflows and discounting cash outflows. Sample Excel models demonstrate calculating these metrics for investment projects.

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    Fin Model Class2 Excel NPV Irr, Mirr Slides

    Uploaded by

    Gel vira
    154 views5 pages
    This document summarizes key concepts in financial modeling and capital budgeting techniques. It discusses net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). NPV discounts expected cash flows to determine if a project's value exceeds its costs. IRR is the discount rate that sets NPV to zero. MIRR uses separate rates for reinvesting cash inflows and discounting cash outflows. Sample Excel models demonstrate calculating these metrics for investment projects.

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    This document summarizes key concepts in financial modeling and capital budgeting techniques. It discusses net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). NPV discounts expected cash flows to determine if a project's value exceeds its costs. IRR is the discount rate that sets NPV to zero. MIRR uses separate rates for reinvesting cash inflows and discounting cash outflows. Sample Excel models demonstrate calculating these metrics for investment projects.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    154 views5 pages

    Fin Model Class2 Excel NPV Irr, Mirr Slides

    Uploaded by

    Gel vira
    This document summarizes key concepts in financial modeling and capital budgeting techniques. It discusses net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR). NPV discounts expected cash flows to determine if a project's value exceeds its costs. IRR is the discount rate that sets NPV to zero. MIRR uses separate rates for reinvesting cash inflows and discounting cash outflows. Sample Excel models demonstrate calculating these metrics for investment projects.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 5

    Financial Modeling Class

    Capital Budgeting: NPV, IRR, MIRR

    Fall 2019
    Bruce Tavel
    Financial Modeling: Advanced Excel: NPV, IRR, MIRR
    • Companies and investors often need to make capital budgeting / investment
    decisions, to compare the cost to the value. One method is to compute the
    present value of the cash flows the asset is expected to generate. Once this value
    is determined the company / investor can decide whether to invest in the asset
    by comparing its computed value to how much the asset costs to purchase.
    Following this decision making procedure helps ensure that value is maximized
    and that appropriate choices are made between alternative project
    opportunities.
    • The interest rate used as discount rate of return is often known as the cost-of-
    capital, a minimum acceptable rate investors expect, a benchmark for new
    investments. It may simply be the cost of borrowing money or it may be the
    desired rate of return for the company / investor.
    Financial Modeling: Advanced Excel: NPV, IRR, MIRR (cont’d)
    • Net Present Value
    NPV = F(0) +F(1)*(1+i)^(-1) + F(2)*(1+i)^(-2)+…+F(n)*(1+i)^(-n)
    where: F(t) = expected cash flow at time t
    i = cost of capital, discount rate, per period

    Open “FIN_MODEL_CLASS1_CLASS3_USING_EXCEL_FINANCIAL_FUNCTIONS_PART_1” file


    TAB “PROBLEM_4”

    Here we have Project1 , Project2 to consider


    We compute NPV for each project under a range of discount rates (IRR) using a one-way DataTable
    Also, use Goal Seek to determine the indifference IRR; Graph shows what is going on.
    We find that NPV(Project1) > NPV(Project2) for IRR> 6.4%
    And NPV(Project1) < NPV(Project2) for IRR< 6.4%
    Financial Modeling: Advanced Excel: NPV, IRR, MIRR (cont’d)

    • Internal Rate of Return (IRR) Excel function IRR


    If NPV > 0 then the project generates a return that is greater than the costs used to purchase the
    project.
    The IRR is defined as the rate of return that the investor would earn, on average if invested;
    such that NPV = 0.
    F(0) +F(1)*(1+i)^(-1) + F(2)*(1+i)^(-2)+…+F(n)*(1+i)^(-n) = 0
    Having computed the IRR, the potential investor can compare IRR to interest rates in the market
    place or to the cost of capital; also, to other alternative project IRR’s
    Financial Modeling: Advanced Excel: NPV, IRR, MIRR (cont’d)
    IRR function requires a guess, your best estimate, then it will solve for actual IRR
    How can we provide a best guess, an approximation ?
    Take the equation:
    NPV = F(0) +F(1)*(1+i)^(-1) + F(2)*(1+i)^(-2)+…+F(n)*(1+i)^(-n)
    Note that: (1+i)^(-t) ≈ 1 –t*i ( so called binomial series: (1+i)^(t) = 1+ i*t + t*(t-1)/2! *i^2+… )
    Solve for i
    i ≈ ( NPV – F(0) + Sum F(t),t=1,n ) / Sum t*F(t),t=1,n if NPV = 0 then i ≈ (Sum F(t),t=1,n - F(0) ) / Sum t*F(t),t=1,n
    Our sample problem, in spreadsheet, shows IRR ≈ 9.52 % then IRR = 11.68% using the Excel IRR function

    • Modified IRR : Excel function MIRR


    MIRR is a frequently used performance tool. It is a variation of the IRR
    It computes IRR but with an explicit reinvestment rate for any positive cash flows ( i.e, cash inflows ), any negative cash flows (i.e., cash outflows) are discounted using
    a finance rate “ a safe rate” .

    Open “FIN_MODEL_CLASS1_CLASS3_USING_EXCEL_FINANCIAL_FUNCTIONS_PART_1” file


    TAB “PROBLEM_8”

    Our sample problem, in spreadsheet, shows an IRR = 18.00% but when we use a reinvestment rate of 10% the MIRR = 15.98 %
    MIRR = ( Future Value of positive cash flows / Present Value of all negative cash flows )^(1/n) - 1
    Hence the MIRR here is less than the IRR, as expected.
    The MIRR is simply the IRR calculation but we have modified the cash flows into a new set of cash flows using more
    realistic rates of reinvestment and discount.

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