Saturday, February 21, 2009

Modified Internal Rate of Return

Spreadsheets at Work: Rating Your Own IRR - Technology -
"...might you be vulnerable to the weaknesses long pointed out — if too often ignored — by researchers who have warned that IRR calculations often contain built-in reinvestment assumptions that improperly improve the appearance of bad projects....the MIRR function permits both a finance and reinvestment rate to be associated with the stream of cash outflows and inflows in our investment evaluation example"
An article on MIRR (Modified Internal Rate of Return)!!??! Wow. Talk about your exciting articles. Yeah, ok, too much, but given anyone who is doing any capital budgeting (which is essentially everyone if you think about capital budgeting as nothing more than making decisions about what assets you want to have) should know the limitations of their tools (IRR in this case) and better technologies (MIRR in this case), it is a worthwhile read! Especially if you are in my classes since it now make MIRR and IRR instantly testable for any upcoming exam.

BTW it also has a really useful example that could be used in class.

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