Which of the following statements is CORRECT?
A) The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
B) One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.
C) The higher the WACC, the shorter the discounted payback period.
D) The MIRR method assumes that cash flows are reinvested at the crossover rate.
E) The MIRR and NPV decision criteria can never conflict.

Question

Quizplus · Accepted Answer

The MIRR method is preferred by some people because it assumes a more realistic reinvestment rate than the IRR method, which assumes that cash flows are reinvested at the project's IRR. This can lead to the multiple IRR problem. Choice A is incorrect because the IRR method can be subject to the multiple IRR problem. Choice C is incorrect because the discounted payback period is inversely related to the WACC - the higher the WACC, the longer the discounted payback period. Choice D is incorrect because the MIRR method assumes that cash flows are reinvested at the firm's cost of capital, not at the crossover rate. Choice E is incorrect because there can be cases where the MIRR method and NPV method provide conflicting decisions due to differences in assumptions about reinvestment rates and cash flow timing.

Which of the Following Statements Is CORRECT