Mirr vs. Irr
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 relevant period of time for the project, compares projects, comparison with a hurdle rate and relates to the corporations goals. In this same survey three percent of the firms use the Modified Internal Rate of Return. The three percent that use the Modified Internal Rate of Return indicate that they use it because incorporates a more realistic investment rate, also uses cash flows instead of accounting income, it is easy to understand and is easy to compute. (Burns and Walker, 1997). Although the Internal Rate of Return is used more
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 relevant period of time for the project, compares projects, comparison with a hurdle rate and relates to the corporations goals. In this same survey three percent of the firms use the Modified Internal Rate of Return. The three percent that use the Modified Internal Rate of Return indicate that they use it because incorporates a more realistic investment rate, also uses cash flows instead of accounting income, it is easy to understand and is easy to compute. (Burns and Walker, 1997). Although the Internal Rate of Return is used more
References: Burns, R. M., & Walker, J. (1997). Capital budgeting techniques among the fortune 500: A rationale approach Keef, S., & Olowo-Okere, E. (1998). Modified internal rate of return: A pitfall to avoid at any cost! Management Accounting, 76(1), 50-51 Kierulff, H. (2008). MIRR: A better measure. Business Horizons, 51(4), 321. Retrieved from http://search.proquest.com/docview/195371128?accountid=32521 Ross, S., & Wethersfield, R., Jaffe, J., & Jordan, B. (2011). Corporate finance: Core principles and applications (3rd ed.) Ryan, P. A. & Ryan, G.P. (2002) Investment Practices of the Fortune 1000: How things have changed? Journal of Business and Management, 8(4) 355-364 Beaves, R. G. (1998) Net Present value and rate of return: Implicit and explicit reinvestment Assumptions