Alternative Evaluation Methods for Non-Conventional Investment Projects

Abstract

The paper considers evaluation of investment projects using the MIRR method. It has been proved that, for non-conventional projects the MIRR increases as a finance rate increases, i.e. the MIRR fails to characterize the rate of return in such cases. We showed how to eliminate the MIRR’s dependence on a finance rate, and proved that in this case the MIRR becomes the ‘equivalent rate of return’ proposed by Solomon. The IRR method does not assume reinvestment, and can be applied for evaluating projects in which the cost of capital varies over time. The IRR method does not need to modify for conventional projects. The GIRR and GERR indices based on the GNPV approach are considered as alternatives to the MIRR. Several non-conventional projects have been evaluated using the MIRR and GNPV rules. In order to verify the estimates, we drew up a simple project balance sheet, which demonstrated correctness of the results based on the GNPV rule and errors inherent in the MIRR application.