IRR vs. MIRR Valuation Methods

Topics: Net present value, Investment, Cash flow Pages: 4 (1255 words) Published: February 9, 2012
Carrie Simmons

IRR v. MIRR Valuation Methods

Bus 650 Managerial Finance

Kristi Rayford

February 7, 2012

1.

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...


References: Brigham, E., & Gapenski, L., (1997) Financial Management: Theory and Practice. The Dryden Press, 8th Ed. 
Quality Assurance Bureau, (2007) Internal Control Guide [Online] Office of the Comptroller, Accessed 10 August 2010, from http://www.mass.gov/Aosc/docs/business_functions/bf_int_cntrls/Internal_Control_Guide_Volume_I.pdf
University of London External System. Chapter2: Basic Investment Appraisal Methods, Finance Management, Accessed 10 August 2010, from http://www.londonexternal.ac.uk/current_students/programme
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Read more: http://www.investorwords.com/2644/IRR.html#ixzz1ljejzFeG
http://www.investopedia.com/articles/07/internal_rate_return.asp#13287431191342&close#ixzz1lprNBp00
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