Over the past sixty years Net Present Value (NPV) and the Internal Rate of Return (IRR) have emerged from obscurity to become the overwhelming picks for the quantitative measurement of investment attractiveness in modern corporations. Despite their present popularity NPV nor IRR was designed to deal effectively with the vast majority of investment issues, meaning those where periodic free cash flows are created between the time of asset purchase and the time of sale. NPV presumes that regular cash flows can and will be reinvested at the NPV discount rate, either at another risk adjusted discount rate or the cost of capital; IRR assumes reinvestment at the IRR.
MIRR A Better Measure Case Study Solution
Neither premise is generally realistic. Moreover, when evaluating projects in terms of their financial attractiveness, the two measures may rank projects otherwise. This becomes important when capital budgets are limited. Eventually, a project may have several IRRs if cash flows go from negative to positive more than once. The Modified Internal Rate of Return (MIRR), found in the 18th century, does account for these cash flows. This post explains the difficulties with NPV and IRR, describes how MIRR works, and demonstrates MIRR deals with weaknesses in NPV and IRR.
PUBLICATION DATE: July 15, 2008 PRODUCT #: BH285-HCB-ENG
This is just an excerpt. This case is about FINANCE & ACCOUNTING
Related Case Solutions & Analyses:
LabourNet: Empowering Informal Sector Labourers
Hiring Professionals in China: Practitioners Guide
Greening the Balanced Scorecard
Clarence Saunders: The Comeback King
Assessing the Franchise Option
Best Financial Services Inc.
Corporate Governance at Citic Pacific
Forest City Tennis Club – Pro Shop and Bar Lounge
Hansson Private Label, Inc.: Evaluating an Investment in Expansion, Spanish Version
Amaranth Advisors: Burning Six Billion in Thirty Days
