Is MIRR better than NPV? Has MIRR become popular? Why?
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The Modified Internal Rate of Return measure was created to eliminate the unrealistic reinvestment rate assumption of the Internal Rate of Return. Given that MIRR is better than IRR, does the MIRR have any disadvantages? Or is the MIRR an equivalent measure to the net present value? In other words, will the MIRR and NPV agree in it's accept/reject decision all of the time?
A company is considering a project with a life of 3 years. The initial investment is $15,000 with annual cash inflows of $7,000. Assume the Cost of Capital is 10%.
Calculate the NPV , the IRR and the MIRR.
a) NPV
b) IRR
c) MIRR
d) ADOPT-REJECT DECISION
Analyze the pros and cons of the commonly used measures ( NPV, IRR, PI, MIRR, DPB) and come to a conclusion based on the literature that you surveyed as to which methods are theoretically correct and those popular. Emphasize real-world practices of capital budgeting methods, including project approval processes.