Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A) A project's MIRR is always greater than its regular IRR.
B) A project's MIRR is always less than its regular IRR.
C) If a project's IRR is greater than its WACC,then the MIRR will be less than the IRR.
D) If a project's IRR is greater than its WACC,then the MIRR will be greater than the IRR.
E) To find a project's MIRR,we compound cash inflows at the IRR and then discount the terminal value back to t = 0 at the WACC.

Question

Quizplus · Accepted Answer

One could prove that (1)if the IRR is equal to the WACC,then the MIRR and the IRR will be equal, (2)if the IRR is greater than the WACC,the MIRR will be less than the IRR,and (3)the MIRR will be greater than the IRR if the IRR is less than the WACC.This situation exists because the MIRR assumes reinvestment at the WACC and therefore compounds at that rate,while the IRR assumes reinvestment at the IRR itself and therefore compounds at the IRR.Therefore,if the IRR exceeds the WACC,the TV found under the IRR method will be larger,and vice versa.The IRR and the MIRR are found as the rate that causes the PV of the TV to equal the cost.Therefore,if the IRR exceeds the WACC,causing the IRR's TV to be larger,then the IRR will exceed the MIRR,and vice versa.As a result,statement c is correct--if the IRR exceeds the WACC,the IRR will exceed the MIRR.The other statements are false.Note too that this answer could also be confirmed with a numerical example.

Which of the Following Statements Is CORRECT? Assume That the Project