MIRR, BEP

What Is Modified Internal Rate of Return

(MIRR)?

• The modified internal rate of return (MIRR) assumes that positive

cash flows are reinvested at the firm's cost of capital and that the
initial outlays are financed at the firm's financing cost.
• By contrast, the traditional internal rate of return (IRR) assumes
the cash flows from a project are reinvested at the IRR itself. The
MIRR, therefore, more accurately reflects the cost and profitability of
a project.
• PV= TV/(1+MIRR)^n
• KEY TAKEAWAYS
• MIRR improves on IRR by assuming that positive cash flows are
reinvested at the firm's cost of capital.
• MIRR is used to rank investments or projects a firm or investor may
undertake.
• MIRR is designed to generate one solution, eliminating the issue of
multiple IRRs.
 Break Even
Analysis (BEA)
 The break-even analysis (BEA) has considerable
significance for economic research, business decision
making, company management, investment analysis
and public policy.
 The BEA is an important technique to trace the
relationship between cost, revenue and profits at the
varying levels of output or sales.
 IN BEA, the break-even point is located at that level of
output or sales at which the net income or profit is
zero. At this point, total cost is equal to total revenue.
Hence, the break-even point is the no-profit-no loss
zone.
 Break even analysis is an algebraic or graphic model
which relates costs and revenues for different volumes
of production.
 It clearly demarcates the line between profit and loss.
 Break even analysis, the relationship among cost,
volume of sales and profit are put together
graphically.
 The break-even point may be defined as that level of
sales in which total revenues equal total costs and
net income is equal to zero.
 This is also known as no-profit no loss point.
Break Even Point
CASE: Your monthly expenditure is 15000 including all the rental,
communications, food, and beverages, etc.. and your per day salary is
1000, so the moment you earn 15000 it becomes a Break-Even Point for
you and anything earned after BEP will be considered as Profit.
• So in business terms, if the amount of profit and expenses are equal
that is called BEP. In simple terms, BEP is the point where the cash
inflow of a project should equal the cash outflow of the project.
• The cost could come in multiple ways and we classify that into “Fixed
Cost, Variable Cost, and Other Miscellaneous Cost”. Now we will see
some of the real-time examples of finding the break-even point in
excel analysis.
• Example #1
• Ms. Sujit has undertaken a project of producing two-wheeler tires for
a period of two years. To produce 1 tire she has to spend Rs. 150 for
each tire and her fixed cost per month is around Rs. 35,000 /- and
another miscellaneous cost is Rs. 5,000/- per month. She wants to sell
each tire at Rs. 250 per tire.
• Now she wants to know what should be the per month production to
achieve the break-even point for her business.
• Now from this information, we need to enter all these details given
above to the worksheet area, below I have listed the same.
 Break-Even Chart
• Break-even chart shows the relationship between cost and sales and
indicates profit and loss on different quantity on the chart for analysis
where the horizontal line shows the sales quantity and the vertical
line shows the total costs and total revenue and at the intersection
point it is breakeven point which indicates no profit and no loss at
given quantity.
• On the vertical axis, the breakeven chart plots the revenue, variable
cost, and the fixed costs of the company and on the horizontal axis,
the volume is being plotted. The chart helps in portraying the
company’s ability to earn a profit with the present cost structure.
 The Break-even Chart (BEC)
 In recent years, the break-even charts have been
widely used by business economists, company
executives, investment analysts, govt agencies and
even trade unions.
 A break-even chart (BEC) is a group of the short-run
relation of total cost and of total revenue to the rate
of output and sales.
 The BEC graphically shows cost and revenue relation
to the volume of output. It thus depicts profit-output
relationship. Hence, the BEC is also called profit
group.
 Break Even Point
 The break even point (BEP) of a firm can be found out in two ways. It
may be determined in terms of physical units and in terms of money
value
 Physical terms – volume of output
 Money terms – sales values
 The Break-even Chart (BEC)
 In recent years, the break-even charts have been
widely used by business economists, company
executives, investment analysts, govt agencies and
even trade unions.
 A break-even chart (BEC) is a group of the short-run
relation of total cost and of total revenue to the rate
of output and sales.
 The BEC graphically shows cost and revenue relation
to the volume of output. It thus depicts profit-output
relationship. Hence, the BEC is also called profit
group.
 The BEC graphically shows cost and revenue relation
to the volume of output.
 The volume of output is measured along the X-axis,
cost and revenue are measured along the Y-axis
 The fixed cost which is represented by the horizontal
curve FC on the chart. The variable cost function is also
assumed to change linearly in a constant proportion to
the change in output rate.
 The break-even point is the point at which total revenue
equals total cost so net profit is zero at OQ level of
output.
 Assumption
1. The cost function and the revenue function are
linear.
2. The total cost is divided into fixed and variable
costs (TC = FC + VC)
3. Selling price is constant
4. The volume of sales and the volume of production
are identical.
5. Average and marginal productivity of factors are
constant
6. The product-mix is stable in the case of a multi-
product firm
7. Factor price is constant
Details
• On the X-axis (horizontal), the number of units is shown and on the Y-axis (vertical), a dollar amount is
presented.
• The blue line in the graph represents total fixed costs amounting to $ 1000,000. The line of the fixed costs is
straight as the fixed cost remains unchanged irrespective of the number of units sold by the company.
• The green line represents revenue from the products sold. For example, selling 10,000 units of the bag would
generate a revenue of $ 1,200,000 (10,000 x $ 120) for the company, and selling of 8,000 units of the bag
would generate a revenue of $ 960,000 (8,000 x $120).
• The red line represents the total costs i.e., the sum of the fixed costs and the variable costs. Like in the
present case, if a company sells the 0 units, then the variable cost of the company would be $ 0 but the fixed
costs will be incurred in that case also so the fixed cost would be $ 1000,000 making the total costs to $
1000,000. Now if a company sells the 10,000 units, then the variable cost of the company would be $
200,000 (10,000 x $20) and the fixed costs would be $ 1000,000 making the total costs to $ 1,200,000.
• As calculated above the breakeven point of the company is at the 10,000 units. At breakeven point, revenue
of the company would be $ 1,200,000 (10,000 x $ 120), the variable costs would be $ 200,000 (10,000 x 2)
and the fixed costs would be $ 1,000,000 making the total cost of $ 1,200,000 ($ 200,000 + $ 1,000,000).
• Analysis
• Now, when the number of units sold exceeds the breakeven point of
10,000 units than the company Bag Ltd. would be making profits on
the goods sold. As per the chart when the green line of the revenue is
greater than the total costs red line after the 10,000 units produced
and sold then Bag Ltd. would be making profits on the goods sold.
Likewise, in case the number of units sold is below 10,000 units, then
the company Bag Ltd. would be in loss. As per the chart, 0-9,999 units
produced and sold total costs red line is above the green total
revenue line where the company Bag Ltd. would be in loss.
• Another Example
 Table: Total Revenue and Total Cost and BEP

Output in Total Total Total Total Cost

units Revenue Fixed Cost Variable
Cost
0 0 150 0 150
50 200 150 150 300
100 400 150 300 450
150 600 150 450 600
BEP
200 800 150 600 750
250 1000 150 750 900
300 1200 150 900 1050
1. Fixed cost – it is the cost which does not change
with production of output (FC)
Cost of land and building
Salaries to top management
Insurance
Depreciation
Taxes on property and equipment.
2. Variable cost – If the cost changes depending on
output volume it is known as variable cost. It
represented by VC
Cost of raw-materials and labour
Transportation of finished product
Packaging cost etc.
1. Total cost – It is the sum of FC and VC. It is
also known as manufacturing cost
Total cost = FC + VC
2. Profit – sales revenue which comes from selling
the final product minus the manufacturing cost.
Profit = Sales Revenue – Total cost
Profit = TR – (FC + TVC)
Understand the reasons for estimating fixed and variable costs.

Costs

Fixed costs Variable costs

Total fixed costs do not Total variable costs

change proportionately change proportionately
as activity changes. as activity changes.

Per unit fixed costs Per unit variable cost

change inversely as remain constant as
activity changes. activity changes.
 Y Y VC
Variable costs

Fixed costs C3

C2
C1 FC
C1
Cost

O M1 M2 M3 X O M1 M2 M3 X
Quantity
Summary
• Break-even analysis tells us at what level an investment has to reach
so that it can recover its initial outlay.
• It is also considered as a measure for the margin of safety.
• It is used broadly be it the case of stock and options trading or
corporate budgeting for various projects.
• ARR
The ARR formula can be understood in the following steps:
Step 1 – First figure out the cost of a project that is the initial investment required for the
project.
Step 2 – Now find out the annual revenue that is expected from the project and if it is
comparing from the existing option then find out the incremental revenue for the same.
Step 3 – There shall be annual expenses or incremental expenses in case comparing with
the existing option, all should be listed.
Step 4 – Now for each year deduct the total revenue less total expenses for that year.
Step 5 – Divide your annual profit arrived in step 4 by a number of years the project is
expected to stay or a life of the project.
Step 6 – Finally, divide the figure arrived in step 5 by the initial investment and resultant
would be an annual accounting rate of return for that project.