Which of the following is (are) true regarding the MIRR capital budgeting method? Select one: a....
Which of the following is (are) true regarding the MIRR capital budgeting method? Select one:
a. The MIRR avoids the possibly high reinvestment rate found in the IRR method
b. Like the IRR, the MIRR calculation ignores the WACC
c. The MIRR measurement provides a dollar answer, unlike the IRR
d. None of the above
Homework Answers
Ans Part A) The MIRR avoids the possible high reinvestment rate found in IRR Method
Explanation: The MIRR overcomes the flaw in IRR. The major problem with the IRR is the assumption that the cash flows are reinvested at the same rate at which they were generated. However, this is an unrealistic assumption as in real world the investment opportunity might not be available at such high rates as that of ongoing project. This leads to overstatement of future values of cash flows.
Whereas, the MIRR ignores such high reinvestment rates and considers that cash flows will be reinvested at the external rate of return. The rate is generally set equal to the company’s cost of capital.
Part B is incorrect as MIRR considers WACC rate as which the cash flows will be reinvested.
Part C is incorrect as MIRR is calculated in percentage terms and not in dollars.
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Which of the following is (are) true regarding the MIRR capital
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