NPV, IRR, MIRR, and PI

Capital Budgeting
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Capital Budgeting
Investment evaluation is a key procedure in determining projects to invest in. The process determines the risk and the expected returns from an investment. The common methods of investment evaluation are; Net Present Value (NPV), Internal Rate of Return (IRR), Modified Internal Rate of Return (MRR), and Profitability Index (PI). All these methods can choose the most suitable projects to invest in.
The NPV appreciates that a dollar today is not equal to a dollar tomorrow. The investment’s cash flows are discounted using an appropriate discount rate to determine their present values. The total value of all cash flows (outflow and inflows) equals NPV. Using NPV projects with a positive NPV should be undertaken, and those with negative NPV should be forgone. The one with the highest positive NPV should be undertaken (Zamfir, Manea, & Ionescu, 2016). Applying this to projects X and Y, both have positive NPVs of $966.01 and $630.72, respectively. Both are financially viable projects and should be undertaken if they are independent. Each project will result in value addition by the end of year four. If both projects are mutually exclusive, Brittle Company should undertake project X as it has a higher NPV.
The IRR estimates the profitability of a project by determining the discount rate, which would result in zero NPV. Projects with IRR above the cost of capital (discounting factor) should be undertaken as they will result in a profit (Arshad, 2012). The higher the IRR, the more attractive a project is. Project X IRR is 18.03%, and that of Y is 14.96%. Both projects have IRRs that are higher than the discounting rate of 12% and should be undertaken if they are independent. If the projects are mutually exclusive, project X should be undertaken since it has a better internal rate of return than Y.
MIRR improves on the IRR by considering that positive cashflows of a project are reinvested at the firm’s cost of capital...