MODIFIED INTERNAL RATE OF RETURN (MIRR)
This method is a financial analysis to rank alternative investment projects of equal size. This method is modification of internal rate of return modification of internal rate of return method and was used to overcome the short comings of IRR method
MIRR has only one value while IRR has more than one value for projects with alternative cash flows.The IRR methods most important drawback is its assumption that interim cash flows are reinvested at the same rate of return as that of the project that generated it MIRR has resolved this problem (Robert Parrino & David s. Kidwell, 2009).

A. PROBABILITY INDEX:
Under this method investment proposal are evaluated in terms of benefit and cost. It is the ratio of the present value of cash inflow at the required rate of return to the initial cash outflow of the investment (Robert Parrino & David s. Kidwell, 2009).
Probability index is calculated as follows
PI= PV of Cash inflows
Initial cash outflow
Accept Reject rule:
Accept if PI>1
Reject if PI <1
Merits of PI method:
• Time value of money is considered
• It helps in identifying the profitability of a project.
• It helps in ranking the project, as under this method it is possible to calculate the amount of value created per unit of investment.

B. DISCOUNTED PAYBACK PERIOD METHOD (DPBP):
Under discounted payback period method cash flows are discounted at the present value and considered the number of periods taken in recovering the initial investment. This method does not consider the cash flow that occurs after the payback period (Harold Bierman, Seymour Smidt, 2006).
Accept Reject Rule:
The project with lowest payback period is accepted and the one with the highest payback period is rejected (Robert Parrino & David s. Kidwell, 2009).
Merits:
1. Simple and easy to calculate.
2. Time value of money is not considered.
De-merits:
It does not consider the entire cash flow as it takes cash flow only till the outflow is recovered.

Posted Date: 2/6/2012 10:35:36 PM | Location : United States

Ask an Expert

Related Discussions:- modified internal rate of return mirr, finance, Assignment Help, Ask Question on modified internal rate of return mirr, finance, Get Answer, Expert's Help, modified internal rate of return mirr, finance Discussions

Write discussion on modified internal rate of return mirr, finance
Your posts are moderated

Write your message here..

Related Questions

FOCP, THE USER INTERFACE THE USER INTERFACE

Shell moulding process merits and demerits, Q. Describe shell moulding proc... Q. Describe shell moulding process merits and demerits . Ans. Shell moulding process           Merits                                                   (i) Bett

Rake angle, end cutting angle end cutting angle

Miller sweep generator, I want circuit diagram of miller sweep generator wi... I want circuit diagram of miller sweep generator with components using two transistor bc547

Binary cycle, Consider the binary cycle using the sodium and steam/water in... Consider the binary cycle using the sodium and steam/water in the sketch below and operating at conditions in Table 1. Draw T S Diagram and find the thermal cycle efficiency

Digital electronics, Design 2:1 MUX with strobe input using NAND gates Design 2:1 MUX with strobe input using NAND gates

Aeroengine - axial flow compressor , An axial-flow air compressor consists ... An axial-flow air compressor consists of 10 rotor/stator stages each built from p gblades of identical cross-section and designed such that the axial velocity is constant throughou

Flight control - root location, In a continuous time linear system whenever... In a continuous time linear system whenever any of the characteristic roots, say λ, has a positive realpart, ie R e (λ) = λ R > 0, then the system is unstable. Stability is ensure

Budget and determining, In Corporate finance, Experts engaged in this occup... In Corporate finance, Experts engaged in this occupation have the liability to increase the organization's revenue, shareholder's money, investment spending budget and determining

Evaporation, 2-17 Given a wind speed of 5.0 m/s at 2 m above the ground and... 2-17 Given a wind speed of 5.0 m/s at 2 m above the ground and a roughness length of 0.8 cm, compute (a) the friction velocity, in centimeters per second, and (b) the wind speed, i