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It is important to understand the difference between the MIRR and IRR methods and the cases of their application. The Modified Internal Rate of Return (MIRR) is a capital budgeting tool that measures the attractiveness of a project in the market (Rustagi, 2021). It is a modification of IRR hence, it aims to resolve some of the challenges of IRR (Rustagi, 2021). The acceptance benchmark for MIRR is that if MIRR is greater than the expected return, the project should be undertaken. One of the strengths of MIRR is that it considers the time factor for money as well as all cash flows of the project. It also helps to correct issues of the IRR method and helps to make an investment decision (Rustagi, 2021). On the other hand, MIRR does not solve the problem of choosing the incorrect mutually exclusive project for a set range of rates. Besides, it also requires an estimate of the cost of capital to make the best investment decision.
Despite the internal rate of return (IRR) metric’s popularity among company managers, it has a tendency to exaggerate a project’s profitability, which can result in capital planning errors based on an unrealistic estimate. This shortcoming is addressed by the modified internal rate of return (MIRR), which also allows managers more control over the anticipated reinvestment rate from future cash flow. The IRR method is a metric applied to determine the financial success of any project undertaken by an investor. Using IRR, one has to calculate the IRR rather than using the provided rates in the market (Zhang, 2021). The method is applied in case a project has stable cash flows and will be used to analyze the projects separately.
Reference
Rustagi, R. P. (2021). Investment Analysis & Portfolio Management. Sultan Chand & Sons.
Zhang, L. (2021). The Review for the Development of IRR’s Implication. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 1770-1774). Atlantis Press.
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