Engineering Economic Analysis

Difficulties in Solving for an Interest Rate 239

External Investing Rate

-$0.5M

-$1.5M

• $2.5M

-$4M

External

Financing

Rate

P(1+MIRR)n=F

FIGURE 7A-5 MIRR for the oil well.

Adding an oil well to an existing field had the cash flows summarized in Figure 7A-5. If the

firm normally bOlTowsmoney at 8% and invests at 15%, find the modifiedinternal rate of return

(MIRR).

i~OlUTlO~

Figure 7A-6 shows the spreadsheet calculations.

FIGURE7A-6MIRR for oil well.

Itis also possible to calculate the MIRR by hand. Whilemorework, the proceSsdoes clarify what

the MIRRfunction.is doing.

1. Each period's cash flow is already a single net receipt or,y~Rendittlre.


2. Find the present.worth of the expenses with the financingrate.
   1:1 :: ::: IIIIi '...'"'" -. - -~ - -

RW~ --4M -'O.5M(PIF, 8%, 5)-1.5M(P I F,8%,6) --2.5M(P IF,8%, 7)

II !II= = ~ == '.', ~iM. --Qft~M,(Q~q~.Q§}--1~jO.63,02) -' 2.5M4o.5835)..;:;~.(j,,;z44M#k1'~

--

. 'I

"

A B C I D E F G H I

1 8% externalfinancingrate I

2 15% externalinvestingrate

I

(^3) Year. 0 (^1) I (^234567)

4 Cash Flow -4.00 3.50 I 2.50 I 1.50 0.50 -0.50 -1.50 -2.50

(^5) 13.64% Cell A5 contains =MIRR(A4:14,AI,A2) ,
-.' ,...