IRR v. MIRR Valuation Methods

IRR v. MIRR Valuation Methods

Introduction

There are different valuation methods which can be used to allocate resources in the business. These methods are termed as capital budgeting since they provide valuable decision on long term investments. This improves both the timing the provided funds and quality of the provided funds. According to research, projects are productive if they have appropriate forecasted time and companies can recognize earnings much faster than expected. But companies should consider that if the project is not implemented on the define time then company can suffer losses. The main theme of this paper will be on Valuation Methods IRR and MIRR.

Discussion

Management of Finances

Companies have a specific department that deals with the company's finance. Finance Department and its team expected to offer a quality valuation on each projects assign to them. For this, their main focus is on the capital budgeting, a method that highlights the acceptability of the projects. According to the finance theory there are four basic methods on basis of which company construct their investment decision. These methods are Net Present Value, Internal Rate of Return, Payback period and Accounting Rate of Return and these methods offers a reliable investment decisions. The decision made by managers is related to the assets which firm can purchase and how this asset will be finance and managed with the existing resources. Hence to fulfill these responsibilities, finance managers usually execute the most favored valuation method (Damodaran, 2011).

Argument and identification of main issues

Companies have various options available for investment and some time they have several competing options with similar resources where decision has to be made for most preferable one. This is a situation where company has to select one project based on the most feasible measure from different dimensions, as at time few measures conflict while other do not. With the term dimensions it means Qualitative & Quantitative factors as their weights varies with circumstances and priorities. For instances, in order to create strong and long term relationship with sound and high profile client, manager need to select and overlook quantitative factors for forecasting the secure future project (Gordon, 2003).

Nevertheless, Qualitative factors have no connection with this paper. In order to select among quantitative methods, the result of the above mention quantitative methods techniques will conflict. For example, Project 1 might have a favorable IRR while Project B might have Better NPV. Now here, which method to be considered and what drawbacks drawn in while calculating them. This paper, investigate quantitative techniques for project analysis and to examine the most suitable method appropriate in real world situation.

IRR and Its Application

Internal Rate of Return is considered one of the most important Return Analysis for project appraisal, Leveraged Buyout and Private Equity Deals as well as in Bond YTM. IRR is the growth rate a project is predictable produce in future. In simple word, it is a rate where present value of project cash flows will equal to ...