Page 33 - Microsoft Word - 00 P1 IW Prelims.docx

Investment appraisal

3.3 Problems with the IRR

There are a number of problems with the standard IRR calculation:

 The assumptions. IRR is often mistakenly assumed to be a measure of the
return from a project, which it is not.

 Choosing between projects. Since projects can have multiple IRRs (or none at
all) it is difficult to usefully compare projects using IRR.

 The decision rule is not always clear cut. For example, if a project has two IRRs
(or more), it is difficult to interpret the rule which says ‘accept the project if the
IRR is higher than the cost of capital’.

3.4 The MIRR

The MIRR has been developed to counter the above problems since it:

 is unique

 gives a measure of the return from a project

 is a simple percentage.

21