Financial modelling: IRR, MIRR ND PI

Financial modelling: IRR, MIRR ND PI

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  IRR,MIRR AND PI GROUPNO. 13 Presented by- Joel Abraham Easo 18 Vishal Mishra 47 Abhilash Prakash 62 Ravi kumar 108 Roshan kumar 111
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  CONTENTS  INTERNAL RATEOF RETURN (IRR)  FORMULA  ADVANTAGES OF IRR  DISADVANTAGES OF IRR  MODIFIED INTERNAL RATES OF RETURN(MIRR)  ADVANTAGES OF MIRR  DISADVANTAGES OF MIRR  PROFITABILITY INDEX (PI)  ADVANTAGES OF PI  DISADVANTAGES OF PI
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  INTERNAL RATE OF RETURN(IRR) Internal rate of returns is that rate at which the sum of discounted cash inflow equals the sum of discounted cash outflow. In other words it is the rate which discounts the cash flow to zero. IRR is the discount rate (or rate of return) at which the net present value is zero. The IRR is compared to the required rate of return (k).  If IRR > k, the project should be accepted
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  Cont..  Evaluation ofIRR Method. I. Time value. II. Profitability measure. III. Acceptance rule. IV. Shareholder value.
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  INTERNAL RATE OF RETURN(IRR)  11 0    n t t t C k C 0 where: = initial cash outlay on project = net cash flow generated by project at time t = life of the project = internal rate of return t C C n r
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  ADVANTAGES OF IRR This method considers all the cash flows over the entire life of the project.  Cost of capital need not be calculated.  Projects having different degrees of risk can easily be compared.  It takes into account the time value of money.
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  DISADVANTAGES OF IRR It is difficult to understand and use in practice because it involves tedious and complicated calculation.  Sometimes it may yield negative rate or multiple rates which is rather confusing.  It is applicable mainly in large projects.
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  MODIFIED INTERNAL RATESOF RETURN(MIRR) The discount rate at which the Present value of a projects cost is equal to the present value of its terminal value, where the terminal value is found as the sum of the future values of the cash inflows compounded at the firms cost of capital.
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  ADVANTAGES I. MIRR isa better and improved for project evaluation. II. As it obviates all the shortcomings of normal IRR and NPV methods. III. It take into consideration the practically possible reinvestment rate.
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  DISADVANTAGES  MIRR isthat it asks for two additional decisions i.e. determination of financial rate cost of capital.
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  PROFITABILITY INDEX (PI) Profitabilityindex (PI) is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project. Evaluation of PI Method:- I. Time value. II. Value maximization. III. Relative profitability.
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  Cont.. . PV of netcash flows Benefit Cost Ratio Initial cash outlay  Decision rule: Accept if benefit–Cost Ratio > 1 Reject if benefit–Cost Ratio < 1
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  ADVANTAGES OF PI It consider time value of money.  It take into account the cash flow inflows and outflows throughout the economic life of the project.  PI ascertains the exact rate of the project.
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  DISADVANTAGES OF PI It is difficult to understand interest rate or discount rate.  It is difficult to calculate profitability index if two projects having different useful life.
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  Thank You…!