A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:

Question

Matteo Baxter

Business

4 July, 17:10

A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:

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Ali Murray · Answer 1

modified internal rate of return

Explanation:

The modified internal return rate (MIRR) implies that surplus cash flows are reallocated at just the capital cost of the company, and also that the original expenditures are funded at the funding cost of the business. Conversely, the conventional intrinsic return rate (IRR) implies that cash flows from an investment are reallocated in the IRR component.

Holdings or initiatives of imbalanced size are ranked using the MIRR. The measurement is a remedy to two biggest problems with the prominent measurement of IRRs. The first major issue with IRR is the ability to find multiple options for same venture.

The second issue is that in reality the policy of reinvesting surplus cashflow at the IRR is found unsustainable. With the MIRR there's only single option for a specific project and in reality the business growth potential of optimistic cash flows is much more real.