Is this statement true or false? "The primary difference between the MIRR and the regular IRR is that MIRR assumes that cash inflows are reinvested at the WACC, whereas the regular IRR assumes reinvestment at the IRR. Since reinvestment is generally at a rate close to the WACC, the MIRR is generally closer to the "true" rate of return a project will provide."

Question

Alessandro Ross

Business

6 March, 14:26

Is this statement true or false? "The primary difference between the MIRR and the regular IRR is that MIRR assumes that cash inflows are reinvested at the WACC, whereas the regular IRR assumes reinvestment at the IRR. Since reinvestment is generally at a rate close to the WACC, the MIRR is generally closer to the "true" rate of return a project will provide."

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Cindy · Answer 1

True

Explanation:

The modified internal rate of return (MIRR) is a better reflection of the profitability of a project. When you calculate the MIRR, you must assume that the project's cash flows will be reinvested at the company's capital cost (WACC). While the internal rate of return (IRR) assumes cash flows are invested at the project's IRR. When you calculate the MIRR of a project you eliminate the possibility of multiple IRRs.

MIRR = ⁿ√{ [FV (Positive cash flows*Cost of capital) ] / [PV (Initial outlays*Financing cost) ]} - 1

where:

FV = the future value of positive cash flows at the cost of capital for the company

PV = the present value of negative cash flows at the financing cost of the company

n=number of periods