MIRR: A Better Measure Harvard Case Solution & Analysis

Over the past sixty years Net Present Value (NPV) and the Internal Rate of Return (IRR) have emerged from obscurity to become the overwhelming picks for the quantitative measurement of investment attractiveness in modern corporations. Despite their present popularity NPV nor IRR was designed to deal effectively with the vast majority of investment issues, meaning those where periodic free cash flows are created between the time of asset purchase and the time of sale. 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.

MIRR A Better Measure Case Study Solution

Neither premise is generally realistic. Moreover, when evaluating projects in terms of their financial attractiveness, the two measures may rank projects otherwise. This becomes important when capital budgets are limited. Eventually, a project may have several IRRs if cash flows go from negative to positive more than once. The Modified Internal Rate of Return (MIRR), found in the 18th century, does account for these cash flows. This post explains the difficulties with NPV and IRR, describes how MIRR works, and demonstrates MIRR deals with weaknesses in NPV and IRR.

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

This is just an excerpt. This case is about FINANCE & ACCOUNTING

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