Evaluation of Nonconventional Projects: GIRR and GERR vs. MIRR

Abstract

This article considers evaluation of nonconventional projects and projects with cash outflows occurring not only at the beginning of project. It has been proved that, being a monotonically increasing function of a discount or finance rate, the modified internal rate of return (MIRR) fails to characterize the rate of return of such projects. 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 generalized internal rate of return (GIRR) and generalized external rate of return (GERR) indices based on the generalized net present value (GNPV) approach are considered as alternatives to the MIRR. Several nonconventional projects have been evaluated using the MIRR, GIRR, and GERR rules. In order to verify the estimates, we drew up a simple project balance sheet, which demonstrated correctness of the results based on the GIRR and GERR rules and errors inherent in the MIRR application.

Acknowledgments

The authors thank Gillian M. Nicholls for helpful comments and the two anonymous reviewers for their suggestions and comments.

Additional information

Notes on contributors

Nikolay Yu. Kulakov

Nickolay Yu. Kulakov is a chief financial officer of an investment and finance company. He has worked in the financial field since 1995, specializing in asset management, investment planning, and financial planning for individuals and companies. He graduated from the Moscow Institute of Physics and Technology (MIPT), Faculty of Radio Engineering and Cybernetics. His scientific research has been related to the development of technologies and information processing systems in the radio-optical range. He received his Ph.D. in physics from the MIPT in 1988. His areas of interest at that time included mathematical modeling related to neural networks and their applications to associative memory optimization problems. He has been an expert and consultant in investment analysis since the mid-1990s working for a number of major development companies. Now his research focuses on investment analysis of the stock market, financial instruments, real estate, and, in particular, nonconventional projects. He has many years of experience in applying theoretical research to industries such as construction and mining, among others.

Anastasia Blaset Kastro

Anastasia Blaset Kastro is a financial analyst with the CompuLink group of companies. Her responsibilities include providing feasibility reports on government programs related to information technologies. She received her Ph.D. in economics from The Higher School of Economics in 2012. She graduated from The Higher School of Economics in 2008 specializing in IT and economics. Her research interests include evaluation of nonconventional projects in different areas.