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MIRR: A Better Measure Case Solution & Answer

This Case is about BUDGETING, DECISION MAKING, STRATEGY

PUBLICATION DATE: July 15, 2008 PRODUCT #: BH285-HCB-ENG

Over the preceding sixty years Net Present Value (NPV) and the Internal Rate of Return (IRR) have materialized from obscurity to become the devastating picks for the quantitative measurement of investment attractiveness in modern corporations. Despite their present popularity NPV nor IRR was designed to cope efficiently with the vast bulk of investment issues, meaning those where regular free cash flows are created between the time of sale and the time of asset purchase.

MIRR A Better Measure Case Solution

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. Neither premise is generally not unrealistic. Additionally, when assessing jobs when it comes to their financial attractiveness, jobs may be ranked by both measures otherwise. This becomes significant when capital funds are limited. If cash flows go from negative to positive eventually, a job may have several IRRs. This post describes MIRR works, clarifies the issues with IRR and NPV, and shows MIRR deals with weaknesses in NPV and IRR.

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