Abstract
The Internal Rate of Return (IRR) and Modified Internal Rate (MIRR) of Return are imperative to understanding the investment on a project and the expected returns or profitability. Under the valuation method of IRR is to accept the project which has the greater number of required rate of return, or otherwise, reject the project. However, MIRR is better indicator of the project’s true profitability

IRR v. MIRR Valuation Methods

The Internal Rate of Return (IRR) is defined as the rate of return that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity. The Modified Internal Rate of Return (MIRR) assumes that positive cash flows are reinvested at the firm's cost of capital, and the initial outlays are financed at the firm's financing cost. Therefore, MIRR more accurately reflects the cost and profitability of a project. (inestwords ) Valuation methods can be used to appropriately allocate the needed resources. This can improve timing and the quality of the allocated funds. The invested projects are expected to be profitable in the forecasted time frame. It is best if organizations make the profit faster than expected time frame, because going beyond that timeline can create losses. The underlying principle of IRR is to present the expected rate of return of the project. If the IRR exceeds the cost of funds used to finance the project, a surplus remains after paying for the capital, and this surplus accrues to the firm’s stockholders. Therefore, taking the project which the IRR exceeds its cost of capital increases shareholder’s wealth. On the other hand, if the IRR is less than the cost of capital, then the decision to take on the project imposes a cost on current...

...MIRRVS. IRR
Charles Beale
Ashford University
Business 650 Managerial Finance
Professor Rick Kwan
September 17, 2012
The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold, ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.
The use of Internal Rate of Return in business as a method to evaluate how attractive an investment is for a corporation has been one of the most popular for the Fortune 1000 companies. Of the Fortune 1000 companies that responded to a survey on what they use evaluate investment options seventy six percent indicated that they use the Internal Rate of Return. Their preference is due to the fact that the Internal Rate of Return appeals to the intuition of top executives and because it deals mainly with percentages (Ryan and Ryan, 2002). There are attractive features to the Internal Rate of Return in that it uses cash flows as opposed to accounting income, time value of money is accounted for, cash...

...capital budgeting decisions?
The NPV method is theoretically the most appropriate method for making capital budgeting decisions because it measure wealth creation, which is the assumed goal of financial management. NPV is an absolute measure of a project’s profitability and indicates the expected change in owners’ wealth from a capital investment. As an evaluation technique, NPV considers all expected future cash flows, the time value of money, and the risk of the future cash flows. Thus, NPV can help identify projects that maximize shareholder wealth.
If a firm selects a project with an NPV of $75,000, what impact should this decision have on shareholder wealth?
If the estimated cash flows and discount rate are accurate, this project should increase shareholder wealth by $75,000.
If a project's NPV is positive, what does this suggest about the required versus estimated return on the project? What does this suggest about accepting the project?
A positive NPV suggests that the estimated return on the project is greater than the required return for the project. The NPV decision rule is to accept a project whose NPV is greater than zero because this investment should increase shareholder wealth.
The IRR measures a project’s yield or expected rate of return. This return does not depend on anything except the cash flows of the project. Thus, the IRR provides a single number summarizing the merits of a...

...Capital Expenditure ValuationMethods
The payback period is the time it takes for a project or investments cash outflows to be recovered by cash inflows generated from the same project or investment. It is a very simple and commonly used capital budgeting technique. The formula used to compute the payback period is initial investment divided by cash inflow per period. You generally want to choose the investment that provides the shortest payback period, because you will get you cash back and it can be put toward other investments or projects. The longer the payback period the riskier it is. Top management will normally have a target payback period. They should select the project that offers a payback period less than the target. There are a few advantages of using the payback period calculation. It is very simple to calculate, and it is a good measure of risk in a project. As stated before, the longer it will take to return the money on the project the riskier it is. Also, for companies that have liquidity problems, it provides a good resource on what investments will return money the quickest. A big disadvantage of the payback period is that it does not take into account the time value of money which can lead to wrong decisions. It also ignores any benefits that occur after the payback period, so it does not accurately measure profitability.
The discounted payback period is also used to compute the time it takes to recover the cost of an...

...Business studies 1
Finance
Exam NO. B023549 Tutor Mr.Henri Aitken 08/03/2012
Finance
Nowadays a correct decision in business world means wealth. Money is desired and techniques to choose the best option what to invest in have been developed. Purpose of this essay it to look at the modes of discounted cash flow valuation (DCF). Discounted cash flow valuation looks for present value, which has to be invested in order to obtain specific amount of money at the end of process. This valuation depends both on time value of money and opportunity cost of capital. Net present value (NPV) and internal rate of return (IRR) are the two methods of DCF valuation. The preferred one is NPV whereas it still has some disadvantages which I will focus on afterwards. The main aim is to pick up reasons why IRR is less recommended compared to NPV technique.
Net Present Value
Net Present Value approach is a measure for assessing the profit arising from investment. It is measure of how much could be added to an initial cash outflow by undertaking an investment. It is the difference between project’s market value and its cost. NPV accounts for the time value of money by expressing future cash flows in terms of their value today, by discounting. It recognises that money has a cost (interest), so that one would prefer to have a certain amount of money today rather than in future. If there...

...NPV Versus IRR W.L. Silber
I.
Our favorite project A has the following cash flows:
-1000 0
0 1
0 2
+300 3
+600 4
+900 5
We know that if the cost of capital is 18 percent we reject the project because the net present value is negative:
- 1000 + 300 600 900 + + = NPV 3 4 (1.18) (1.18) (1.18)5
- 1000 + 182.59 + 309.47 + 393.40 = -114.54
We also know that at a cost of capital of 8% we accept the project because the net present value is positive:
- 1000 +
300 600 900 + + = NPV 3 4 (1.08 ) (1.08 ) (1.08 )5
- 1000 + 238.15 + 441 .02 + 612 .52 = 291.69
II.
Thus, somewhere between 8% and 18% we change our evaluation of project A
from rejecting it (when NPV is negative) to accepting it (when NPV is positive). We can calculate the point at which NPV shifts from negative to positive by searching for the value of r, called the internal rate of return (IRR) in the following equation, which makes the NPV=0.
- 1000 +
300 600 900 + + =0 3 4 (1 + r ) (1 + r ) (1 + r )5
More generally, if CFi is the cash flow in period i, the IRR is that rate, r, such that:
CF0 +
CFt CF1 CF2 + +L+ =0 2 (1 + r ) (1 + r ) (1 + r )t
In our case, CF0 = -1000, CF3 = 300, CF4 = 600 and CF5 = 900. All the other CFi = 0.
III.
The IRR can, in general, only be derived by trial and error. Putting our values for
the CFi into a calculator (very carefully) we find the IRR=...

...Net Present Value
Net present value (NPV) and Internal rate of return (IRR) are used to determine whether to accept a project or not.Net Present Value (NPV)Net present value is the difference between the present value of cash inflows and the present value of cash outflows. It is used in capital budgeting to analyze the profitability of an investment or project.
NPV= sum[CFt/(1+r)t]-C0
CFt– cash flow in the time t
C0 – initial investment
r – periodic interest rate
NPV rule:
Accept all independent projects with NPV greater than 0 as they add value to shareholder. In case of mutually exclusive projects, the project with the highest NPV should be chosen
Advantages:
Direct measure of the dollar contribution to the stockholders.
NPV method is preferable for non-normal cash flows (e.g. negative cash flows)
Disadvantage:
Does NOT measure the project size.
Internal Rate of Return (IRR)
The discount rate makes the net present value of all cash flows from a project equal to zero. The higher a project's internal rate of return, the more desirable it is to undertake the project. IRR can be used to rank several prospective projects a firm is considering.
NPV= Sum[CFt/(1+r)t]–C0
r = internal rate of return (IRR)
IRR rule:
Accept all independent projects with IRR greater than cost of capital. In case of mutually exclusive projects, the project with the highest...

...Note on Valuation Models: CCFs vs. APV vs WACC
Fabrice Bienfait
Table of Content Introduction..................................................................................................................................... 2 Enterprise Valuation ....................................................................................................................... 2 The Weighted Average Cost of Capital Approach ......................................................................... 2 The Adjusted Present Value Approach........................................................................................... 4 The Capital Cash Flow Approach................................................................................................... 4 Numerical Example ........................................................................................................................ 5 Conclusions..................................................................................................................................... 7 References....................................................................................................................................... 8 Figures and Tables Figure 1: WACC as a Function of the Debt Ratio .......................................................................... 3 Table 1: Assumptions (in...

...Limited’s valuationmethods and valuation trend of two selected accounts. Accounting II – AB1102 Lau Chew King 11-03-2013
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Abstract
This report is an...