Question

1. The Modified Internal Rate of Return (MIRR) method for capital budgeting decision making is superior to the Internal Rate of Return (IRR) method.(True/False) 2. The regular payback period method for capital budgeting decision making is superior to the discounted payback period method(True/False) 3.The Modified Internal Rate of Return (MIRR) solves both the non normal cash flow problem as well as the reinvestment rate problem(True/False) 4.An underlying assumption of TVM theory is that all positive cash flows earned during the investment period are reinvested at the same rate of return for the investment until the end of the investment (True/False)

Answer 1

Answer 1) Statement os TRUE : The Modified Internal Rate of Return (MIRR) assumes that initial investments are financed at firm cost of finance and cash flows are being reinvested at firm cost of capital . IRR assume that cash flows are being reinvested at IRR rate . MIRR is more relastic compared to IRR .

2. Statement is FALSE : Payback period is the period where a project is able to recover its intial investment . Discounted payback period is the period where a project is able to recover its investment in real term (After discounting cash flow to its present value) . Discounted payback factor time value of money is more superior .

3. Statement is TRUE : The Modified Internal Rate of Return (MIRR) solves both the non normal cash flow problem as well as the reinvestment rate problem

4 . Statement is TRUE : An underlying assumption of TVM theory is that all positive cash flows earned during the investment period are reinvested at the same rate of return for the investment until the end of the investment