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

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).