MIRR: A better measure

Over the past 60 years Net Present Value (NPV) and the Internal Rate of Return (IRR) have emerged from obscurity to become the overwhelming choices for the quantitative measurement of investment attractiveness in modern corporations. Despite their current popularity, neither NPV nor IRR was designed to deal effectively with the vast majority of investment problems, meaning those where periodic free cash flows are generated between the time of asset purchase and the time of sale. NPV assumes that periodic cash flows can and will be reinvested at the NPV discount rate, either at the cost of capital or another risk adjusted discount rate; IRR assumes reinvestment at the IRR. Neither assumption is usually realistic. In addition, when evaluating projects in terms of their financial attractiveness, the two measures may rank projects differently. This becomes important when capital budgets are limited. Finally, a project may have several IRRs if cash flows go from negative to positive more than once. The Modified Internal Rate of Return (MIRR), discovered in the 18th century, does account for these cash flows. This article explains the problems with NPV and IRR, describes how MIRR works, and demonstrates how MIRR deals with weaknesses in NPV and IRR.     

变革者的经验法则

变革是任何组织永恒的主题--相信我,下面介绍的变革者经验法则,会对很多在推动变革过程中不断受挫的人们有所裨益.     

Prepurchase financing pool: Revealing the IRR problem

Internal rate of return (IRR) is one of the most common and important indicators in investment analysis because it is often used by managers and practitioners as a decision-making criterion. Moreover, the IRR reflects the financial cost in financing decisions and it helps to answer the following question when comparing different financing alternatives: “Which loan is the cheapest?” Among the different types of loans in Brazil, there is a financial product called a prepurchase financing pool (PPFP) that is generally regarded as the best option for financing or loans. The objective of this article is to use the prepurchase financing pool to show the flaws of IRR in financial analysis. In particular, when IRR is used to evaluate the prepurchase financing pool, one finds problems of reliability regarding (i) existence, (ii) uniqueness, and (iii) economic interpretation of the rate. The results show that the prepurchase financing pool is relevant evidence that the IRR flaws are found in financial products.     

Optimizing service-level and relevant cost for a stochastic multi-item cyclic production system

A multi-item make-to-order production system in a stochastic environment is analyzed. Assuming a common cycle production approach, the impact of safety stock, cycle time, demand, processing time and setup time on service-level and total relevant cost (holding, setup and backorder cost) is determined. To illustrate this relationship a trajectory for the service-level with respect to the relevant cost (holding and setup) is presented. Furthermore algorithms to calculate the cycle time which leads to maximum service-level at constant safety stock and to calculate the pair cycle time and safety stock which minimize total relevant cost are introduced.     

On de-seasonalising adjusted-average formulae

The techniques of Borgan (1979) are extended to cover data with seasonal variations. Examples are given, and it is suggested that the formulae presented here give smoother results than those traditionally employed to deal with economic time series subject to seasonal variations.