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Document Cited in Related
Vincent
AuthorMackey, Paul
PositionLetters - Letter to the Editor

The author of "The third way" (October) observes that "the MGR when added to the cost of capital percentage is an approximation of the MIRR". In fact, the precise relationship between these rates of return is given by: MIRR = cost of capital + MGR+ MGRx(cost of capital); or, if you prefer, (1 + MIRR) = (1 + MGR) x (1 + cost of capital). This holds true even when the cost of capital varies over the life of the project (in which ease we'd use the average cost of capital in the above formula).

This close relationship between the MIRR and the MGR means that the MGR adds little that is new to the investment appraisal process. Since NPV > 0, MGR> 0 and MIRR> cost of capital are all equivalent conditions, each measure is equally capable of supporting accept/reject decisions. Also, as present values and future values are linked by the cost of capital, MIRR is also "based" on the NPV and caters for variations in the cost of capital in the same way as the MGR.

It boils down to an issue of presentation: the MIRR is easy to explain and understand, as it relates the initial investment in the project to the projected amount of cash in the bank at the end of the project. The MGR quantifies the additional compound growth, over and above the cost of capital, delivered by a project.

There is also an error in the calculation of the MIRR given in table 2 of the article. Since 585,000 [pounds sterling] x (1 + 16.4%)10 = 2,671,072 [pounds sterling]

Paul MackeyACMA

Author's response:

Paul...

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