Answer:
Explanation: Part 1
To calculate the internal rate of return, positive cash flows into the future are added to their present value and then discounted at various rates. A project's profitability can be evaluated with both IRR and MIRR. One such comparison involves the marginal internal rate of return MIRR and the internally needed rate of return IRR. By factoring in the gap between the upfront investment and the anticipated reinvestment rates of future cash flows, the modified internal rate of return MIRR value exceeds the conventional internal rate of return IRR value. Although MIRR "can" handle negative cash flows, it will incorrectly do so in this instance. But when discounting at an internal rate of return, the net present value of all cash flows will be positive. The internal rate of return MIRR is a key metric in capital budgeting, where it is used to determine whether or not an investment project is worthwhile. If the project's MIRR is higher than the expected return, for instance, the investment is desirable. The MIRR approach assumes more realistic reinvestment rates than the IRR approach.
Explanation:Please refer to solution in this step.
Answer:
Part 2
A decision to invest should be made if the MIRR is higher than the expected return. The project should be discarded if the MIRR is lower than the anticipated return. The project with the higher MIRR should be selected if the options are incompatible. It is assumed that a company will reinvest its surplus cash in accordance with its cost of capital. However, IRR provides a less reliable estimate of future returns. The accuracy of IRR is drastically lower than that of MIRR. For a given discount rate used in calculating NPV, if the investment and reinvestment rates are the same, then the MIRR will be equal to the NPV. Due to its more comprehensive treatment of the impact of time lag on reinvestment, the MIRR is the superior indicator when project or business cash flows diverge from initial projections.