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Abstract

The use of modified IRR in developmental projects has been demonstrated by using data pertaining to four watersheds — two from Tamil Nadu and two from Maharashtra. The conventional internal rate of return (IRR) widely used in project evaluation, suffers from certain problems, most important one being the assumption of reinvestment at the rate of IRR, which has been often contested in project evaluation literature. The ranking of projects based on IRR and NPV may also come into conflict due to this assumption. Scale and time span differences across projects often make it difficult to compare. In India, the use of conventional IRR still prevails even though improvements have been suggested in literature long ago, perhaps for the reasons of ease in handling. Application of modified IRR method coupled with adjustment for scale and time span differences suggested in literature, has been demonstrated in this paper using data for watersheds. The study has shown that the rate of return from investment watershed is less lucrative when MIRR is used with necessary adjustments for scale and time span and the ranking based on IRR and NPV is consistent. The ranking of the projects has been found to change by using the adjusted MIRR methodology.

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