Internal Rate of Return Assignment Help

Please read the article “A better way to understand internal rate of return” of McKinsey, November 2015. As we have already learnt how to calculate IRR and main assumption about this project evaluation criteria do you see the way we should approach IRR suggested by McKinsey a useful recommendation? What are additional criteria on top of those we learnt in the class we can use?

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IRR  is the rate of return which is a minimum necessary to invest in a project or a fund. The same is generally calculated from the cash flows expected to be generated. However, in certain circumstances, the cash flows can change after the investment is made. This means the performance of the project results either improved because of the improvement in the general business environment or it has deteriorated as a result of bad planning. However, it would be impossible in most cases to segregate the components of the IRR as suggested by the Mckinsey paper  (Goedhart, Levy, & Morgan, 2015).

However, as suggested in the Report, the EV/EBITDA multiple can be used to find if the project has been able to increase efficiency through different measures undertaken. However, it must be remembered that performance can be improved without any strategy if the business environment is good. For example, a general decline in supply of the output can lead to increased prices and increased cash flows. The same can’t be assumed to have happened because of any strategic re-positioning. While some of the measures suggested can work to the advantage of the private equity firs, the same might not be true and applicable to other forms of businesses. It would be difficult to generate enough information to disaggregate the internal rate of return in a majority of the projects as suggested by the Mckinsey report (Damodaran, 2012).

To top it all the additional criteria which can be used is that of adding the NPV criteria to augment the results obtained under IRR. However, if the cash flows are not uniform and positioned at either end of the project life period then the same might result in multiple IRR and hence it would be better if MIRR can be used to evaluate the proposals (Brealey, Myers, & Allen, 2017).

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