1.The internal rate of return is often referred to as the yield on an investment
ID: 2796832 • Letter: 1
Question
1.The internal rate of return is often referred to as the yield on an investment. Explain the analogy between the internal rate of return on an investment and the yield to maturity on a bond.
2. The net present value method and the internal rate of return method may produce different decisions when selecting among mutually exclusive projects. What is the source of this conflict?
3. The modified internal rate of return is designed to overcome a deficiency in the internal rate of return method. Specifically, what problem is the MIRR designed to overcome?
Explanation / Answer
1. Internal rate of return describes about investments that have already been made whereas Yield to maturity is used to calculate an investment's ( usually a bond or other fixed income security ) yield based on its current market price
2. In Net present value method cash flows can be reinvested at Project's cost of capital while IRR allows reinvestment at IRR rate and they differ in size and cash flows.
3.The MIRR is used to rank investments or projects of unequal size. The calculation is a solution to two major problems that exist with the popular IRR calculation. The first main problem with IRR is that multiple solutions can be found for the same project. The second problem is that the assumption that positive cash flows are reinvested at the IRR is considered impractical in practice. With the MIRR, only a single solution exists for a given project, and reinvestment rate of positive cash flows is much more valid in practice.
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