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...

...MIRR VS. 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 flows from the...

...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...

...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...

...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...

...ASSIGNMENT TOPIC:
“THE ADVANTAGES AND DISADVANTAGES OF USINFG NPV (NET PRESENT VALUE) AND IRR (INTERNAL RATE OF RETURN)”
NPV (NET PRESENT VALUE)
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.
NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.
Net present value, or NPV, is one of the calculations business managers use to evaluate capital projects. A capital project is a long-term investment or improvement, such as building a new store. The NPV calculation determines the present value of the project's projected future income. In the calculation, the present value of the project's cost is subtracted from the present value of future income. A positive net present value usually means you should accept or implement the project. Business owners who compare two or more projects tend to favor the one with the higher net present value.
ADVANTAGES OF NET PRESENT VALUE (NPV)
1. NPV gives important to the time value of money.
2. In the calculation of...

...VALUATION TECHNIQUES
Vault Guide to Finance Interviews Valuation Techniques
How Much is it Worth?
Imagine yourself as the CEO of a publicly traded company that makes widgets. You’ve had a highly successful business so far and want to sell the company to anyone interested in buying it. How do you know how much to sell it for? Likewise, consider the Bank of America acquisition of Fleet. How did B of A decide how much it should pay to buy Fleet? For starters, you should understand that the value of a company is equal to the value of its assets, and that Value of Assets = Debt + Equity or Assets = D + E If I buy a company, I buy its stock (equity) and assume its debt (bonds and loans). Buying a company’s equity means that I actually gain ownership of the company – if I buy 50 percent of a company’s equity, I own 50 percent of the company. Assuming a company’s debt means that I promise to pay the company’s lenders the amount owed by the previous owner. The value of debt is easy to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information, however, is hard to come by, so it is safe to use the book value.) Figuring out the market value of equity is trickier, and that’s where valuation techniques come into play. The four most commonly used techniques are: 1. 2. 3. 4. Discounted cash flow (DCF) analysis Multiples method Market...

...Equity Valuation: Discounted Cash Flow and Residual Income Models
Introduction
Valuation plays a very important role when companies are trying to increase their value, raise money, acquire another firm or sell a subsidiary, also when a company decides to go public.
Managers, investors and shareholders need to have the most accurate and reliable information in order to make decisions, that is why valuation is a fundamental exercise in corporate finance.
It is pretty evident that whatever the reason, sooner or later there will be a question of how much a firm is worth and very often the answer will not be easy.
Hamadi and Hamadeh (2012, p.104) claim that “determining firm’s value has recently become more problematic”.
Valuation is, indeed, a complicated task. It requires taking in consideration a variety of factors, making a number of assumptions and calculations and of course selecting the most appropriate valuation approach. Equity Valuation is the process of estimating the value held by a firm’s equity holders; it should not be confused with Enterprise Valuation, which is the total value of a firm. They are two different values from two different concepts. By having a clear understanding of it, we will be able to incorporate the appropriate cash flows and discount rates to our valuation analysis.
Analysis
Discounted Cash Flow Models...

...Graduate School of Business Administration University of Virginia
UVA-F-1274
METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS This note addresses the methods used to value companies in a merger and acquisitions (M&A) setting. It provides a detailed description of the discounted cash flow (DCF) approach and reviews other methods of valuation, such as book value, liquidation value, replacement cost, market value, trading multiples of peer firms, and comparable transaction multiples.
Discounted Cash Flow Method Overview The discounted cash flow approach in an M&A setting attempts to determine the value of the company (or ‘ enterprise’ by computing the present value of cash flows over the life of the ) company.1 Since a corporation is assumed to have infinite life, the analysis is broken into two parts: a forecast period and a terminal value. In the forecast period, explicit forecasts of free cash flow must be developed that incorporate the economic benefits and costs of the transaction. Ideally, the forecast period should equate with the interval in which the firm enjoys a competitive advantage (i.e., the circumstances where expected returns exceed required returns.) For most circumstances a forecast period of five or ten years is used. The value of the company derived from free cash flows arising after the forecast period is captured by a terminal value. Terminal value is estimated...

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