Answer to Question #206331 in Management for Prince

Question

SUBJECT : PROJECT PLANNING AND CONTROL

1. Discuss the usage and application of Modified Internal Rate of Return method of capital Budgeting ? (please give at least 2 points for each usage and application )

Answer 1

Modified Internal Rate of Return (MIRR) is a capital budgeting technique financial instrument that determines an investment’s attractiveness and compares assets. Thus, it supposes that positive cash flows could be reinvested at an organization’s capital cost, and the firm’s initial outlays could be financed at the firm’s financing cost. In other words, it accounts for the difference between the re-investment rate and investment return.

Usage and application of MIRR method of capital budgeting

a)     MIRR is used to identify an investment’s project viability. Such that, if the project’s MIRR is higher than its expected return, an investment would be considered attractive. It is applied to reflect a project’s cost and profitability more accurately and determine which one is less cost-effective and profitable.

b)     It could be applied to rank the investments an organization or investor might undertake. Thus, it ensures that the most promising investment is considered. In other words, it helps in measuring an investment’s sensitivity towards variation in capital cost.

c)     MIRR also permits project managers to alter the assumed investment growth rate from diverse stages in a project. Therefore, it is cost-saving. It alters the rate to ensure that less cost is incurred.

d)     Additionally, it is the Internal Rate of Return (IRR) modification. Therefore, it resolves some problems with the IRR. In other words, it would be designed to generate one solution, avoiding multiple IRRs issues.