A capital budgeting model that accounts for an assumed rate of return on interim-period cash inflows from an investment is the:
A) Internal rate of return (IRR) model.
B) Present-value payback period model.
C) Net present value (NPV) model.
D) Accounting rate of return (ARR) model.
E) Modified internal rate of return (MIRR) model.

Question

Quizplus · Accepted Answer

The modified internal rate of return (MIRR) model considers the assumption that interim-period cash inflows can be reinvested at a different rate of return than the initial investment. This makes it a more realistic model compared to the traditional internal rate of return (IRR), which assumes that interim-period cash inflows are reinvested at the same rate of return as the initial investment. The present-value payback period model does not account for any assumed rate of return on interim-period cash inflows, while both the net present value (NPV) and accounting rate of return (ARR) models focus on the total return on investment rather than the rate of return on interim-period cash inflows.

A Capital Budgeting Model That Accounts for an Assumed Rate