But when, exactly? Well, at the beginning of the year we had still had a -2,000 balance, right? So do this.

So we broke even 2/3 of the way through the 3rd year. So the total time required to payback the money we borrowed was 2.66 years.

So in our example, the PI = 1.0375. For every dollar borrowed and invested we get back $1.0375, or one dollar and 3 and one third cents. This profit is above and beyond our cost of capital.

Enter these numbers and press these buttons.

After you enter these numbers the calculator will entertain you by blinking for a few seconds as it determines the IRR, in this case 12.02%. It's fun, isn't it!

Ah, yes, but there are problems.

• Sometimes it gets confusing putting all the numbers in, especially if you have alternate between a lot of negative and positive numbers.
• IRR assumes that the all cash flows from the project are invested back into the project. Sometimes, that simply isn't possible. Let's say you have a sailboat that you give rides on, and you charge people money for it. Well you have a large initial expense (the cost of the boat) but after that, you have almost no expenses, so there is no way to re-invest the money back into the project. Fortunately for you, there is the MIRR.

WHAT?

OK, MIRR assumes that the revenue is not invested back into the same project, but is put back into the general "money fund" for the company, where it earns interest. We don't know exactly how much interest it will earn, so we use the company's cost of capital as a good guess.

Why use the Cost of Capital?

Because we know the company wouldn't do a project which earned profits below the cost of capital. That would be stupid. The company would lose money. Hopefully the company would do projects which earn much more than the cost of capital, but, to play it safe, we just use the cost of capital instead. (We also use this number because sometimes the cash flows in some years might be negative, and we would need to 'borrow'. That would be done at our cost of capital.)