Running Head; IRR & MIRR 1 Internal Rate of Return (IRR) and Modified Internal Rate of Return (MIRR) Internal rate of return refers to the discount rate at which the Net present value of cash inflows is equal to the future value of cash outflows such that the NPV is equal to 0 (Kahraman, Ruan, & Tolga, 2002). NPV of cash inflow= NPV of cash outflow IRR is used by investors to evaluate a project. It is compared to the project`s cost of capital to decide if the project should be accepted or rejected, i.e., if the IRR is higher than the cost of capital, the project is accepted but if IRR is lower than the cost of capital, the project is not accepted. According to Kahraman et al. (2002), Modified internal rate of return (MIRR) is the rate of return of an investment that has been modified to resolve some of the problems with IRR. In IRR, cash flows are re-invested at the IRR, which is not practical. MIRR resolves this issue by using cost of capital. MIRR is used to evaluate a project and its decision rule is similar to that of IRR, that is, if MIRR is higher than the cost of capital, accept the project. The formula for MIRR is; 𝑇𝑒𝑟𝑚𝑖𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 MIRR= 𝑛√ 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ𝑓𝑙𝑜𝑤 − 1 Example 1 A project has an initial investment of $100,000 and it has the following cash inflows. Calculate the IRR and MIRR of the project assuming a cos ...
Purchase document to see full attachment