Over the past sixty years Net present value (NPV) and internal rate of return (IRR) emerged from obscurity to become the overwhelming choice for the quantitative determination of investment attractiveness in modern corporations. Despite its current popularity, or NPV IRR may have been designed to effectively address the problems of the vast majority of investment, that is, those in which the periodic free cash flow generated between the time of purchase and time of sale of assets. NPV assumes that periodic cash flows can be reinvested and will be in the discount rate NPV, or with the cost of capital or other risk-adjusted discount rate, IRR assumes reinvestment at IRR. Neither assumption is generally realistic. In addition, when evaluating projects in terms of financial attractiveness, the two measures can evaluate projects in different ways. This becomes important when capital budgets are limited. Finally, the project may have multiple IRR, when the cash flows go from negative to positive several times. Modified Internal Rate of Return (MIRR), discovered in the 18th century, makes the expense of those cash flows. This article explains the problems with the NPV and IRR, describes how the MIRR, and demonstrates how MIRR involved deficiencies in NPV and IRR. "Hide
by Herbert E. Kierulff Source: Business Horizons 9 pages. Publication Date: July 15, 2008. Prod. #: BH285-PDF-ENG
Related Case Solutions & Analyses:
Miles Everson at PricewaterhouseCoopers
Monitor Technology: Pat Tallon
Death of Diversification The Focusing of the Worlds Industrial Firms 1980-2000
Exclusive Resorts
Sustaining Superior Profits: Customer and Supplier Relationships
Religion And Politics
Lehman Brothers
Organizational Dimensions of Creativity: Motion Picture Production
Bajaj Autos
Business Plan Response
