IMPLICATIONS OF DISCOUNTING METHODS AND RELATIONS BETWEEN NPV, IRR AND MIRR FOR EFFICIENCY EVALUATION OF INVESTMENT PROJECTS

Efficiency evaluation of investment projects in market economy ought to be based mainly on the use of indices based on discount method. These indices, in spite of being known for many years, in many cases are used incorrectly. The discount technique used in the indices requires the selection of a uniform moment of time for which cash flows are discounted as well as the inclusion of the total value of planned/realized investment along with its residual value. The use of the aforementioned indices without proper knowledge regarding not only economics but mathematics as well can result in an inappropriate efficiency evaluation of analyzed investment projects and, as a consequence, lead to undertaking wrong decisions that may put the company at the risk of making considerable losses. This article outlines the consequences of choosing discounting for various moments of time for discounted indices of efficiency evaluation of investments – NPV, IRR and MIRR. It also presents mathematical relations between these methods and the consequences of such relations for the evaluation of investment profitability. The article concludes that as for IRR method, it is of no significance for what period we discount as IRR values, irrespectively of the selected moment of time, will be always equal. Nonetheless, this does not apply to the use of a modified version of IRR method, i.e. MIRR. Here the choice of the moment for which cash surplus will be discounted is of no significance in only one case, i.e. when MIRR equals IRR. The applied conception of calculating MIRR ought to result from the accepted conception of calculating NPV; nonetheless, it does not function this way in practice.