Question

Considering IRR and MIRR, which of the following statements is/are correct?

1. MIRR considers all the cash flows and time value of money.

2. If Project A’s IRR exceeds Project B’ IRR, then A must have the higher NPV.

3. Positive MIRR always leads to positive NPV.

4. Conventional (also known as Normal) cash flows will result in multiple IRRs.

5. All of the above, except d, are correct statements. (I know this answer is wrong, I got marked off).

Answer 1

Only statement a. i.e., MIRR considers all the cash flows and time value of money is correct, rest all is a false statements.

MIRR accounts for both positive and negative cash flows.

It is not necessary that a project with higher IRR will have higher NPV. When the conflict arise between IRR and NPV, NPV is preferred. Higher or lower NPV depends on the rate of return or the discounting rate used by the company. IRR assumes NPV to be zero. In such a situation, we can't say for sure that the project with higher IRR wil have higher NPV.

Both MIRR and IRR assumes NPV to be zero. In such a situation, there is no point of positive NPV, be it positive MIRR.

Situation of multiple IRR arises when there is non conventional (non-normal) cash flows are there.