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Which problem associated with IRR is corrected by using MIRR? A. IRR assumes the cash-flows received...

Which problem associated with IRR is corrected by using MIRR?

A. IRR assumes the cash-flows received are reinvested at the WACC

B. IRR assumes the cash-flows received are reinvested at the IRR

C. IRR assumes the cash-flows received are reinvested at the MIRR

D. IRR assumes the cash-flows received are reinvested at the risk-free rate

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Answer #1

B. IRR assumes the cash-flows received are reinvested at the IRR

The modified internal rate of return (MIRR) assumes that positive cash flows are reinvested at the firm's cost of capital, and that the initial outlays are financed at the firm's financing cost. By contrast, the traditional internal rate of return (IRR)assumes the cash flows from a project are reinvested at the IRR itself. The MIRR, therefore, more accurately reflects the cost and profitability of a project.

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