Question

How does modified internal rate of return (MIRR) differ from IRR?

a. MIRR does not consider cash flows occurring after the cut-off date.
b. MIRR reduces the number of sign changes in a cash flow sequence.
c. MIRR uses NPV, IRR does not.
d. MIRR calculates the PV of cash inflows and then divides by the PV of the investment.

Answer 1

MIRR and IRR differ in several ways. MIRR considers cash flows occurring after the cut-off date, reduces the impact of extreme cash flow patterns, and uses NPV to calculate the present value of cash inflows.

Step-by-step explanation:

The correct answer is a. MIRR does not consider cash flows occurring after the cut-off date.

MIRR (Modified Internal Rate of Return) and IRR (Internal Rate of Return) are both methods used for evaluating the profitability and feasibility of investment projects. However, they differ in a few key aspects:

1. MIRR takes into account cash flows occurring after the cut-off date, while IRR does not. MIRR calculates the present value of all future cash inflows and outflows, allowing for a more comprehensive analysis of the investment's profitability.
2. MIRR reduces the impact of extreme cash flow patterns by assuming a reinvestment rate for cash flows that have not yet occurred. This is in contrast to IRR, which assumes that cash flows are reinvested at the same rate as the initial investment.
3. MIRR uses NPV (Net Present Value) to calculate the present value of cash inflows, whereas IRR does not involve NPV. By considering the time value of money, MIRR provides a more accurate measure of profitability.