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FM11 38 - g 2 What are the MIRR's advantages and...

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Mini Case: 11 - 38 g. 2. What are the MIRR's advantages and disadvantages vis-a-vis the regular IRR? What are the MIRR's advantages and disadvantages vis-a-vis the NPV? Answer: MIRR is a better rate of return measure than IRR for two reasons: (1) it correctly assumes reinvestment at the project's cost of capital rather than at its IRR. (2) MIRR avoids the problem of multiple IRRs--there can be only one MIRR for a given project. MIRR does not always lead to the same decision as NPV when mutually exclusive projects are being considered. In particular, small projects often have a higher MIRR, but a lower NPV, than larger projects. Thus, MIRR is not a perfect substitute for NPV, and NPV remains the single best decision rule. However, MIRR is superior to the regular IRR, and if a rate of return measure is needed, MIRR should be used. Business executives agree. As noted in the text, business executives prefer to compare projects' rates of return to comparing their NPVs. This is an empirical fact.
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