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DUAL RATE DISCOUNTED CASH FLOW ANALYSIS

Journal of Valuation

ISSN: 0263-7480

Article publication date: 1 February 1986

483

Abstract

Discounted cash flow (DCF), whether by capitalisation or by cash flow analysis, has many detractors because of a number of apparent problems such as the reinvestment assumption and the possibility of multiple rates of return. The capital recovery cum reinvestment aspects of Years' Purchase (YP) factors and DCF are discussed and it is demonstrated that Years' Purchase single rate principle is akin to Internal Rate of Return (IRR) and that Years' Purchase dual rate principle also has a DCF image known as the Modified Internal Rate of Return (MIRR). The difference between the YP models and the DCF models is to do with the level cash flows assumed in the former and the variability of the cash flows measured in the latter. MIRR was developed as an answer to the above problems and it is demonstrated in a case study in which the fallacy of the apparent problems is also demonstrated. MIRR has a place in the analysis of investment strategy, but IRR (equated yield) is shown to be satisfactory in the financial analysis and comparison of individual projects.

Citation

ROBINSON, J. (1986), "DUAL RATE DISCOUNTED CASH FLOW ANALYSIS", Journal of Valuation, Vol. 4 No. 2, pp. 143-157. https://doi.org/10.1108/eb007990

Publisher

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MCB UP Ltd

Copyright © 1986, MCB UP Limited

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