Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

a) A project's MIRR is always greater than its regular IRR.

b) A project's MIRR is always less than its regular IRR.

c) If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.

d) To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.

e) To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

Question

Business

Cierra Olsen

9 October, 03:29

Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one cash outflow at t = 0 followed by a series of positive cash flows.

a) A project's MIRR is always greater than its regular IRR.

b) A project's MIRR is always less than its regular IRR.

c) If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.

d) To find a project's MIRR, we compound cash inflows at the regular IRR and then find the discount rate that causes the PV of the terminal value to equal the initial cost.

e) To find a project's MIRR, the textbook procedure compounds cash inflows at the WACC and then finds the discount rate that causes the PV of the terminal value to equal the initial cost.

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Answers (1)

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Snuggles · Answer 1

The answer is: B) A project's MIRR is always less than its regular IRR.

Explanation:

The internal rate of return (IRR) tends to overstate how profitable a project may be and can lead to capital budgeting errors based on overly optimistic estimations. The modified internal rate of return (MIRR) tries to compensate over optimistic estimations by assuming that positive cash flows are reinvested at the company's capital cost and that the initial investment is financed at the company's financial cost.