Question

The modified internal rate of return is the correction that is made to the IRR method...

The modified internal rate of return is the correction that is made to the IRR method due to problems which the IRR method has with:

Select one:

a. Forecasting net cash flows

b. Addressing time value of money

c. Recognizing the investment cost

d. none of the above

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Answer #1

The IRR method involves the finding the discount rate at which the present value of cash inflows from the future years become equal to the present value of cash inflows. It assumes that the cash flows we receive are not re-invested.

In the MIRR method we first compound the cash flows to the terminal year inculding the reinvestment of cash flows at a specified rate and then discounting the future value of cash flows by a rate that is equal to the present value of cash inflows.

So going by the above explanation the basic difference in IRR and MIRR is the discounting and compunding of cash flows and the reinvestment of cash inflows. So option B is the correct answer.

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