When IRR Fails: The Case of Multiple IRRs for the Same Project

[@beomkomap]

Thank you so much. After learning for a few years, I didnt know there is such a formula in Excel for IRR. You made my day teacher!

[@johnkarasev6371]

6:52 note that in some cases, unconventional cash flows are also pure investment or pure borrowing in which case IRR will also work.

[@ananyaimtiazhussain6816]

Thank you for the video. It helped.

[@Edspira]

Glad to hear it!

[@jonen9494]

0:40 you should mention that it's the opposite if the problem consists of financing and not investing.

[@ExcelTutorials1]

I really appreciate the help!!

[@danielkussman7764]

Why would you not want to calculate the Modified IRR? By bringing all outflows to time zero and all inflows to time 1. Then you calculate the MIRR by using your new time zero cash flow and your new time 1 cash flow.

[@haikasatryan]

You can't calculate MIRR due to the fact the information about finance rate is missing.

[@professorikram]

@@haikasatryan You could, under the assumption that financing rate and the reinvestment rate are the same.

[@rissakintanar]

I’m using Mac Numbers to calculate NPV and the amount is $5,427,498.69 which is not the same as the Excel answer. My assumption is the answers should be more or less the same when rounded off, regardless of tool used.

[@Manuel-vz3cu]

thanks!

[@KannapiranArjunan-vm2rq]

papers.ssrn.com/sol3/papers.cfm?abstract_id=2942456 Modified IRR (MIRR) Is a Spurious Criterion and Should Not Be Used in Cost-Benefit Analysis (CBA) and Investment Analysis Kannapiran Arjunan Abstract This paper evaluates whether MIRR is an appropriate criterion for investment decision and the true annual rate of return on capital. Unlike other published papers, the present analysis introduces three important improvements viz. the investment returns are consistent with NCF (NCF-consistent); the two components of returns on capital investment, i.e. return of capital invested (ROC) and return on invested capital (ROIC), are clearly defined and accounted for; and finally, capital amortization schedule (CAS) is used to verify whether the returns are achievable from the NCF generated and therefore NCF-consistent. The appropriateness of MIRR is evaluated using numerical analysis and the main findings are: a. The estimation of MIRR, manually or in excel, is based on the modified net cash flow (MNCF). The MNCF, derived by mathematically adjusting the actual net cash flow (NCF), distorts the intrinsic value of the cash inflow and its timing. With MNCF, the MIRR is lower than the IRR because MIRR failed to fully utilize the NCF generated as shown by the CAS. MNCF is neither NCF-consistent nor accounting concept-consistent (cash vs accrual concept). b. The problem of reinvestment of intermediate income is a fallacy and therefore the MNCF is a meaningless exercise. For the same NCF, the net benefit stream, MIRR is increasing without any limit with increasing investment rates (IR). The NCF is not adequate to support such an increase in MIRR, as revealed by the CAS. Similarly, when the actual IRR is lower than the IR used, the estimated MIRR is higher than the IRR. Again, the NCF is not sufficient to achieve that higher MIRR than the IRR as confirmed by the CAS. This is one of the serious problems with MIRR that is based on the MNCF, a mere data mining exercise. MIRR is not an accurate estimate but a spurious one. c. Again, the problem of multiple IRR is a data problem associated with non-normal NCF. MIRR does not solve this problem either. With non-normal NCF, the cumulative sum of undiscounted NCF is zero or negative or negligible. In those cases, the NCF data leads to multiple IRR. The non-normal MNCF leads to spurious MIRR estimate (also GIRR and AIRR) that is not supported by the actual NCF as revealed by the CAS. Any rate of return must be NCF-consistent. d. With normal NCF also, the MIRR is spurious because of the false reinvestment assumption and the use of MNCF data. The estimated MIRR, based on assumed reinvestment rate, leads to serious problems as explained above. MIRR (when MIRR < IRR) estimate does not fully utilize the benefit stream and leave a closing balance, as revealed by the CAS. Contrarily, IRR fully utilizes the NCF and therefore IRR is higher than the MIRR (paid-off the ROC and ROIC = IRR). When MIRR is higher than the IRR, the NCF does not support that level of MIRR. e. The results of CAS reveal that MIRR is neither the true return nor the annual rate of return. IRR is also not the annual rate of return but it is the true rate of return on the capital remains invested. Both the MNCF and MIRR are not NCF-consistent but may be mathematically-consistent. When there is no intermediate income, the question of reinvestment does not arise. With that type of NCF, the MNCF and the MIRR are NCF-consistent. f. Generalized IRR (GIRR) and Average IRR (AIRR) criteria are also reviewed. They are not NCF-consistent but mathematically generated returns and are based on wrong assumptions (reinvestment). Based on these results, it is evident that the MIRR is a spurious criterion. Investment analysts and decisions makers may wish to move away from using or reporting MIRR as a criterion so also the authors of all published works and finance and economic texts.

[@johneduardgerona4458]

where did u get -17.24% sir

[@charlesfreedenberg5046]

Doesn't know what he's talking about. Just add up the numbers. They add up to a negative 5.5 million. It doesn't take a genius to see that this has to be a negative IRR. And 17.22% is how much you will lose per year on this investment. There cannot be multiple IRR's. Either the numbers exceed the initial outlay, are less than the initial outlay, or are exactly equal to your initial outlay - in which case your IRR = 0%. Multiple IRR's occur when the interim cash flows cause the accumulated cash flows during the holding period cause the accumulated cash flows to rise above and drop below zero. The problem is in the formula. It cannot handle crossing of the zero line. But IRR reflects ALL the cash flows from the investment. It is computed after all cash flows are known. At that point, add up the numbers. They either result in your getting back more than you put in - in which case your IRR is positive. If you get less than what you have put in, your IRR is negative. Period! End of sentence.

[@sobriquet5016]

Period and end of sentence, whilst ending the sentence with a period. Congratulations, you win the 2020 tautology award. Full stop!.