Application of Modified Internal Rate of Return Method for Watershed Evaluation
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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.