IRR v. MIRR Valuation MethodsErin KellyJuly 30, 2012Bus 650 Managerial FinanceKristi Rayford
Over the past several years Internal Rate of Return (IRR) and Net Present Value (NPV) are the most important methods, which are used for the capital budgeting decision. These methods were designed to deal with the investment problems of the organizations and individuals. The periodic cash flows are used to make the investment decision. In evaluating the financial attractiveness of the projects with NPV and IRR also provides different results. It causes the problem for the organization when capital budget are limited (Eagle, Kiefer & Grinder, 2008). But there are some problems in these methods, which caused the emergence of the Modified Internal Rate of Return (MIRR) method for the investment problems.IRR method assumes that the reinvestment is made on the IRR basis, which is not realistic. On the same time a project may have several IRR as the cash flow from the project may go positive and negative. In order to solve the problem of positive and negative cash flows the MIRR method was discovered in 18th century. "The MIRR method provides more accurate results for the capital budgeting decisions". The research paper describes the problems with the IRR and MIRR method and gives a clear picture that MIRR method of capital evaluation is better than the IRR method of capital budgeting. This research paper also explains that MIRR is helpful to deal with the problems of other methods of capital budgeting or investment problems.The research paper also describes the use of MIRR over IRR as it is helpful to provide more effective capital budgeting analysis. It is because; this method is useful for the projects in which cash flows change significantly or for the mutually exclusive projects (Eagle, Kiefer & Grinder, 2008). The project, which has different lives, should also use the MIRR. But at the same time there are some issues in MIRR, as it should be abandoned in making
investment decision for individual projects.Internal Rate of ReturnIRR is also an important discounted cash flow method for the appraisal of capital budgeting proposals. The Internal Rate of Return is the rate, where present value of cash inflows and outflows comes out to be equal or the rate at which NPV from the project comes equal to zero. At this rate, there are no benefits or losses for the Organization. If the Organization earns an IRR on the investment, the NPV will be equal to zero for the investment. It also helps the Management to take a decision regarding investment as to whether they should invest in project or not. A higher IRR makes the project desirable to be undertaken. It provides information about the efficiency of the project because it is based on the assumption that all the cash inflows are invested again in the project at the IRR basis (Brigham & Ehrhardt, 2007). This method is also very difficult to understand and the assumption for reinvesting money is not appropriate.
