The modified internal rate of return is designed primarily to analyze projects that
A)are financing rather than investing projects.
B)are mutually exclusive.
C)have positive and then negative cash flows following the initial cash flow.
D)have significantly different sizes.
E)are both mutually exclusive and have significantly different lives.

Question

Quizplus · Accepted Answer

The modified internal rate of return (MIRR) is specifically designed to handle projects that have a mix of positive and negative cash flows. It addresses a drawback of the traditional IRR method, which assumes that all cash inflows are reinvested at the same rate as the initial investment. MIRR assumes that positive cash flows are reinvested at the firm's cost of capital, while negative cash flows are financed at the firm's borrowing rate. MIRR is useful not just for financing projects, but also for investing projects where cash flows do not follow a uniform pattern. It can be used for projects that are both independent and mutually exclusive, and can handle projects with different sizes and lifecycles. However, MIRR is particularly useful for projects that have positive cash flows at the outset, followed by negative cash flows later on.

The Modified Internal Rate of Return Is Designed Primarily to Analyze