TECHNICAL NOTE—ADJUSTING THE MODIFIED INTERNAL RATES OF RETURN

ABSTRACT

In bis recent paper, D.M. Shull (“Efficient Capital Project Selection Through a Yield-Based Capital Budgeting Technique,” The Engineering Economist, Vol.38, No.l (Fall 1992), pp. 1-18) proposes a concept of the Adjusted Modified Internal Rate of Return (ADJMIRR). In the presented paper, the ADJM1RR is examined as a function of the common investment base, and it is shown that Shull's ADJMIRR may not be defined for some MIRR approaches and for a certain class of unprofitable investment and profitable financing projects. It is also indicated that the potential ADJMIRR undefinability is, in fact, an objective attribute of a rate of return criterion, which can be remedied in the way demonstrated in the paper. A modification to the ADJMIRR concept is proposed that replaces Shull's project related and interest rate dependent investment base by an arbitrary, interest rate independent base unrelated to any of the projects to be ranked. Finally, it is noted that Shull's concept was first introduced by P.J. Athanasopoulos (“A Note on the Modified Internal Rate of Return and Investment Criterion,” The Engineering Economist, Vol.23, No.2 (Winter 1978), pp. 131-133) seventeen years ago.