IRR v. MIRR Valuation Methods Research Paper Example | Topics and Well Written Essays - 2250 words

IRR v. MIRR Valuation Methods - Research Paper Example However, the MIRR valuation method still exhibits a number of limitations noticeable with the use of IRR technique, for instance, its inability to value investments that are mutually exclusive. Additionally, the teaching of both IRR and MIRR in learning institutions has been a cause of concern, with claims that the IRR technique has had more attention at the expense of the MIRR valuation method. This paper focuses on analyzing IRR and MIRR with regard to major issues of concern, emerging issues, factors that have been instrumental in the understanding of IRR and MIRR in class situations, and present and future applications of the two valuation methods. Keywords: IRR (Internal Rate of Return), MIRR (Modified Internal Rate of Return), NPV (Net Present Value) Table of Contents Abstract 2 Table of Contents 3 introduction 3 Main issues in IRR 4 Main issues in MIRR 6 New Learning in IRR 6 New Learning in MIRR 7 Class activities that have facilitated learning and understanding of IRR and MI RR 8 Specific current and future applications and 8 relevance in the workplace 8 Conclusion 10 References 11 introduction The pertinent question in the discussion about IRR and MIRR valuation methods lies in the differences that exist between the two investment appraisal methods. The chief difference in IRR and MIRR valuation methods is traceable to the factors that come into play when calculating the value of an investment with either of the methods. More specifically, the IRR valuation methods, which is more traditional form of the two, measures the worth of an investment with emphasis on internal factors, conspicuously overlooking the impact of interest rates and inflationary impact on the value of an investment. On the contrary, MIRR is a valuation technique that seeks to mitigate the impact of limitations brought about by IRR (Eagle, et al., 2008, p. 70). Just as the name implies, MIRR valuation method is a modification of the IRR valuation method. MIRR allows the value of the investment under query to show the impact of both future and present value of currencies at different times in the life of a project. Largely, IRR technique is an optimistic view on the value of an investment, while the MIRR is a more realistic view on the present and future value of an investment and is deemed more accurate than IRR valuation method (Kierulff, 2008, p. 328). This paper explores the variations between the IRR and MIRR valuation method at length, while taking into account the main issues surrounding the valuation techniques and the future and present applications of the methods. Main issues in IRR The major issue surrounding the IRR valuation method is the method’s inconsideration of environmental factors that have an impact on the value of an investment. The IRR approach compares the net present value of cash inflows and outflows. The point at which the negative cash flows and positive cash flows become equal is the IRR value. Another way to look at the valua tion equation is the point at which the difference between cash inflows and cash outflows equate to zero. In establishing what project to undertake in a scenario where the different projects are under comparison, the project with the highest internal rate of return gets preference over the rest of the projects. Even under this consideration, the IRR value has to exceed the cost of capital rate for the project to be economically viable (Kelleher & MacCormack, 2004, p. 1). Despite its contribution to