POSSIBILITIES OF MIRR METHOD APPLICATION FOR EVALUATION OF INVESTMENTS IN AGRICULTURE: AN EXAMPLE OF PIGS FATTENING
DOI:
https://doi.org/10.5937/ekoPolj1502325IKeywords:
pigs fattening, IRR, MIRR, cost of capital.Abstract
In the case of some agricultural investments, often net cash flow changes its sign from positive to negative, many times during the project. It causes the problem of internal rate of return calculation, which is an important indicator of economic effectiveness of investments. That is, in such situations, internal rate of return cannot be used. To solve this problem, modified rate of return is applied. This paper aimed to describe this method in detail, and to show its calculation for investments in pigs fattening. By application of modifed internal rate of return it is determined that pigs fattening, under assumed conditions, is economically justifed. Also, authors calculated the upper limit of discount rate (cost of capital), to which investment in pigs fattening is economically justifed. It is concluded that, in the case of specifc agricultural investments (such as pigs fattening), the use of traditional internal rate of return could give the wrong image on actual rate of return on investments.
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References
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3. Brealey, R. A., Myers, S. C. (2003): Capital Investment and Valuation, McGraw-Hill, NY, USA.
4. Brigham, F. E., Gapenski, L. C. (1997): Financial Management – Theory and Practice, Eight Edition, the Dryden Press, NY, USA.
5. Cary, D., Dunn, M. (1997): Adjustment of Modifed Internal Rate of Return for Scale and Time Span Differences, Allied Academies International Conference, Proceedings of the Academy of Accounting and Financial Studies, vol. 2, no. 2, Maui, Hawaii, pp. 57-63.
6. Fabozzi, F. J., Drake, P. P., Polimeni, R. S. (2008): The Complete CFO Handbook: From Accounting to Accountability, John Wiley & Sons, NY, USA.
7. Garrison, R. H., Noreen, E. W., Brewer, P. C. (2006): Managerial Accounting, Eleventh Edition, McGraw-Hill/Irwin, Boston, USA.
8. Gogić, P. (2011): Ekonomska efektivnost investiranja u hidromelioracije, Monograph, University in Belgrade, Faculty of Agriculture, Belgrade.
9. Gogić, P., Ivanović, S. (2013): Economics and Financial Analysis of Investments in Raspberry Plantations, Proceedings of the seminar: Agriculture and Rural Development Challenges of Transition and Integration Processes, University of Belgrade, Faculty of Agriculture, Department of Agricultural Economics, September, 27th 2013, Belgrade, pp. 1-11.
10.Green, M. G. (1991): A standard method of property performance measurement, Investment Analysts Journal, spring 1991, pp. 7-19, available at: http://www.iassa.co.za/articles/034_spr1991_01.pdf
11. Ivanović, S. (2008): Ekonomska efektivnost investicija u govedarskoj proizvodnji porodičnih gazdinstava, PhD. Thesis, University in Belgrade, Faculty of Agriculture, Belgrade.
12.Ivanović, S. (2013): Analiza investicija u stočarskoj proizvodnji, Monograph, University in Belgrade, Faculty of Agriculture, Belgrade.
13.Ivanović, S. (2014): Documentation on costs and investments in pigs fattening, Internal unpublished documentation of author, Belgrade.
14. Kierulff, H. (2008): MIRR: A better measure, Business Horizons, vol. 51, no. 4, pp. 321-329.
15.Mackevičius, J., Tomaševič, V. (2010): Evaluation of Investment Projects in Case of Conflict between the Internal Rate of Return and the Net Present Value Methods, Ekonomika, vol. 89, no. 4, pp. 116-130.
16.Merło, P. (2013): Implications of discounting methods and relations between NPV, IRR and MIRR for effciency evaluation of investment projects, Humanities and Social Sciences, vol. XVIII, no. 20(3), pp.103-117.
17.Peterson, P. P., Fabozzi, F. J. (2002): Capital Budgeting: Theory and Practice, John Wiley & Sons, NY, USA.
18. Rosen, L. R. (1995): Handbook of Interest, Yields, and Returns, McGraw-Hill Inc., NY, USA.
19.Rousse, O. (2008): On the bias of yield-based capital budgeting methods, Economics Bulletin, vol. 7, no. 9, pp. 1-8.
20.Satyasai, K. J. S. (2009): Application of Modifed Internal Rate of Return Method for Watershed Evaluation, Agricultural Economics Research Review, no. 22, pp. 401-406.
21.Shim, J. K., Siegel, J. G., Dauber, N. (2008): Corporate Controllers Handbook of Financial Management, CCH a Walters Kluwer Business.
22.STIPS (2014), database of System of Agricultural Market Information of Serbia, STIPS, Ministry of Agriculture and Environmental Protection of the Republic of Serbia, Belgrade, available at: http://www.stips.minpolj.gov.rs/, accessed at: October 2014.
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Published
2015-06-30
How to Cite
Ivanović, S., Nastić, L., & Bekic, B. (2015). POSSIBILITIES OF MIRR METHOD APPLICATION FOR EVALUATION OF INVESTMENTS IN AGRICULTURE: AN EXAMPLE OF PIGS FATTENING. Economics of Agriculture, 62(2), 325–333. https://doi.org/10.5937/ekoPolj1502325I
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