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Good morning John,
I was studying the MIRR video and I understand
that investors will choose projects which have the highest NPV
but I cannot understand why investors will choose projects with a higher MIRR?
From my understanding, it is because the greater PVR generated by a project will result the MIRR to a higher rate?
For example, PVR in question number 3 page 39 is 2,257 and the question gives a MIRR of 12.69%. If the PVR is 2,500 the MIRR will increase to 15% so based on the PVR, companies will choose projects with higher MIRR?
Is my understanding correct?Thank you very much in advance.
Under the DCF criterion when choosing between projects we select the one with the highest NPV.
The IRR is fine for simple accept or reject decisions, but cannot reliably be used to decide when choosing between projects (as I explain in the lectures for FM and AFM).
MIRR will always give the same decision as we would make based on the NPV.
It the PV of the returns were to be 2,500 then the MIRR would increase to 15% and would make the project better. It would also increase the NPV and the project would be better on this basis also.
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