How to Use the WACC to Calculate MIRR
A company needs to reinvest the cash flows that an investment produces. If you're unable to reinvest the money at the same rate of return as the investment producing the cash flows, you can use Microsoft Excel's modified internal rate of return function to calculate the investment's return. You can use your company's weighted average cost of capital as both the finance rate and reinvestment rate to determine MIRR. WACC is a company's average cost of raising debt and equity and the discount rate used to evaluate an investment with the same overall risk as the company.
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Instructions
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Click in cell A1 and type "Initial Investment," "Year 1," "Year 2" and "Year 3" in cells A1, B1, C1 and D1, respectively. Click in the next cell to the right after typing in each cell.
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Click in cell A2 and type "-500," "200," "250" and "300" in cells A2, B2, C2 and D2, respectively. Click in the next cell to the right after typing in each cell. These are the sample investment's cash flows that correspond to the descriptions in cells A1 through D1.
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Click in cell A4 and type "WACC."
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Click in cell B4 and type "0.12." This is the example WACC as a decimal.
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Click in cell A5 and type "MIRR."
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Click in cell B5 and type "=MIRR(A2:D2,B4,B4)" and press "Enter." This inputs the cash flows from cells A2 through D2 and the WACC from cell B4 into the corresponding arguments in the MIRR function, which are values, finance rate and reinvestment rate. MIRR for this investment equals 18.45 percent. This is greater than the company's WACC, which makes it an acceptable investment.
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Tips & Warnings
If you have a reinvestment rate that is different from your WACC, enter it in the MIRR function in place of the second "B4" as the reinvestment rate.
References
- University of Southern California, Marshall School of Business: Microsoft Excel -- XP Intermediate
- Willamette University: Capital Budgeting
- University of Maryland, Robert H. Smith School of Business: Weighted Average Cost of Capital
- Indiana University, Kelley School of Business; MIRR: A Better Measure; Herbert Kierulff; 2008
- Photo Credit Thomas Northcut/Photodisc/Getty Images
