What are the MIRR's advantages and disadvantages vis-a-vis the regular IRR? What are the MIRR's advantages and disadvantages vis-a-vis the NPV?
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What are the MIRR's advantages and disadvantages vis-a-vis the regular IRR? What are the MIRR's advantages and disadvantages vis-a-vis the NPV?
What is the "reinvestment rate assumption", and how does it affect the NPV versus IRR conflict?
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Solution Summary
In a 400+ word solution, MIRR is compared to IRR lsting the conditions and circumstances where one is preferred over the other. The "reinvestment rate assumption" is explained as it creates a conflict in defining preferable methods.
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- What are the MIRR's advantages and disadvantages vis-a-vis the regular IRR? What are the MIRR's advantages and disadvantages vis-a-vis the NPV?
MIRR is a better rate of return measure than IRR for two reasons:
(1) it correctly assumes reinvestment at the project's cost of capital rather than at its IRR rate
(2) MIRR avoids the problem of multiple IRRs--there can be only one MIRR for a given project.
Since reinvestment at the cost of capital is more likely, the MIRR is a better indicator of a project's profitability. Moreover, it solves the multiple IRR problem, as a set of cash flows can have but one MIRR. MIRR is superior to the regular IRR, and if ...
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