IRR Vs MIRR Valuation MethodsBUS650: Managerial Finance (MAH1209A)IRR Vs MIRR Valuation Methods:Thesis Statement: In this paper we will attempt an insight into two ofthe most popular techniques of calculating or evaluating theprofitability of a project, which are the internal rate of return(IRR) or its modified internal rate of return (MIRR). We will alsoattempt to look into both of these methods, and analyze, their prosand cons in respect to the outcome they give. Either way, both methodsare effective in evaluating the best possible scenario for whether ornot 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 offinancial planners, to measure the financial attractiveness ofinvestments. Their usage to study, and analyze alternatives, has grownmanifold, across many domains, from equipment and real estateacquisitions, to company acquisitions; from the valuation of
Information Technology projects to offshore models; and from newproduct introductions to close down existing product lines. The newkid 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 relatedto a project. Cary (2008), states that “Deriving the alternativemethods as functions of NPV not only gives a consistency to thecapital budgeting procedures, but also shows how this approach can beused with the alternative methods, to overcome problems when comparingmutually 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 thediscount rate, will make the initial cash outflow equal to the sum ofdiscounted future cash inflows. If the IRR calculated is more than thereturn rate expected by the investors, then the project is definitelyattractive. The internal rate of return is a rate of return used incapital budgeting, to measure and compare the profitability ofinvestments (Baker, 2000).In other words, the IRR of an investment isthe interest rate at which the costs of the investment lead to thebenefits of the investment. This means that all gains from theinvestment are inherent to the time value of money, and that theinvestment has a zero net present value at this interest rate (Baker,
2000). This valuation acts as a best substitute to a company’s NetPresent Value. In investment terms, if the IRR is greater than thediscount rate, then the project should be accepted (Ross, Westerfield,Jaffe, & Jordan, 2011).