IRR Vs MIRR Valuation Methods - IRR Vs MIRR Valuation Methods BUS650 Managerial Finance(MAH1209A IRR Vs MIRR Valuation Methods Thesis Statement In this

IRR Vs MIRR Valuation Methods - IRR Vs MIRR Valuation...

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IRR Vs MIRR Valuation Methods BUS650: Managerial Finance (MAH1209A) IRR Vs MIRR Valuation Methods: Thesis Statement: In this paper we will attempt an insight into two of the most popular techniques of calculating or evaluating the profitability of a project, which are the internal rate of return (IRR) or its modified internal rate of return (MIRR). We will also attempt to look into both of these methods, and analyze, their pros and cons in respect to the outcome they give. Either way, both methods are effective in evaluating the best possible scenario for whether or not the company should reject or accept a project. Main issues in the chosen area: Tools to Measure an Investment Decision: Over the past few decades, the Net Present Value (NPV), and the Internal Rate of Return (IRR), has emerged to the forefront, to become the most preferred choice of financial planners, to measure the financial attractiveness of investments. Their usage to study, and analyze alternatives, has grown manifold, across many domains, from equipment and real estate acquisitions, to company acquisitions; from the valuation of
Information Technology projects to offshore models; and from new product introductions to close down existing product lines. The new kid on the block, which is the Modified Internal Rate of Return (MIRR), is a derived form of IRR that avoids the common IRR pitfalls, and provides a more accurate view of financial attractiveness related to a project. Cary (2008), states that “Deriving the alternative methods as functions of NPV not only gives a consistency to the capital budgeting procedures, but also shows how this approach can be used with the alternative methods, to overcome problems when comparing mutually exclusive projects that require different size investments (scale problem) or have different lives (unequal life problem)” 2) IRR is the rate of return percentage, which can be used as the discount rate, will make the initial cash outflow equal to the sum of discounted future cash inflows. If the IRR calculated is more than the return rate expected by the investors, then the project is definitely attractive. The internal rate of return is a rate of return used in capital budgeting, to measure and compare the profitability of investments (Baker, 2000). In other words, the IRR of an investment is the interest rate at which the costs of the investment lead to the benefits of the investment. This means that all gains from the investment are inherent to the time value of money, and that the investment has a zero net present value at this interest rate (Baker,
2000). This valuation acts as a best substitute to a company’s Net Present Value. In investment terms, if the IRR is greater than the discount rate, then the project should be accepted (Ross, Westerfield, Jaffe, & Jordan, 2011).

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