CFA Practice Question

CFA Practice Question

Which of the following statements is most correct? The modified IRR (MIRR) method ______

I. calculates a return that is always less than the regular IRR.
II. overcomes the problem of multiple rates of return.
III. always leads to the same ranking decision as NPV for independent projects.
A. II only.
B. II and III.
C. I and II.
Explanation: MIRR assumes that cash flows from all projects are reinvested at the cost of capital, while the regular IRR assumes that the cash flows from each project are reinvested at the project's own IRR. The MIRR is a better indicator of profitability because reinvestment at the cost of capital is generally more correct.

User Contributed Comments 8

User Comment
masha I could find the IRR/NPV in the text book but could not find anything about MIRR for the independent projects
shasha if i don't misunderstand the related LOS, for independent (not exclusive) projects, we do not need to make ranking decision because we don't compare project to project. furthermore, IRR, MIRR and NPV should give same accept or reject decision for each individual independent project.
yanpz Then why III is incorrect???
kuan Hmm. MIRR will always lead to the same decision as NPV for independent project. But not ranking decisions!
wollogo I don't understand, how is MIRR different from the cost of capital?
steved333 If an answer option contains a superlative like "always" or "virtually impossible," you can 9 times out of 10 disregard the option. Rarely will anything be an "always" or "never."
rgat MIRR doesn't address the problem of multiple rates of return but addresses the underlying assumption that cashflows are reinvested at the company's WACC rather than the IRR b/c this is more true to reality.

IRR --> cashflow reinvested @ implied IRR
MIRR --> cashflow reinvested @ cost of capital
GBolt93 MIRR does address the problem of multiple rates of return. That's literally the answer to the problem.
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