Question

1)The modified IRR always leads to the same ranking decision as NPV for independent projects.

TRUE OR FALSE?

2) Assume a project has normal cash flows, its NPV declines as the cost of capital increases.

TRUE OR FALSE?

Answer 1

1. False.
Modified Internal rate of return is a better measure than normal IRR as the cash flows are compounded at the cost of capital and also the initial outflow is financed at the financing cost. On the other hand for IRR the reinvestment is done at the IRR itself.

Both NPV and MIRR would have different ranking if the nature of cash flows are different for the two projects. For example higher cash flow initially followed by lower in one and in the other the cash flow has a different nature then the NPV and MIRR will have different results.

2. True
According to present value formula, PV = cash flow /(1+wacc) , present value of cash flow decreases with increase in the cost of capital. Low Present value of cash inflows will lower the NPV, as NPV is calculated as PV of cash inflows - cash outflow.

Thus, lower the PV lower will be the NPV.