Answer to Question #66323 in Finance for edrik leonata

Question

what are 2 major weaknesses of IRR which are adressed by MIRR? Explain how MIRR is able to resolve one of weaknesses you have identified

Answer 1

1. IRR assumes that the reinvestment rate is the same as the IRR itself. MIRR more realistically reflects the cost of a project as assumes that positive cash flows are reinvested at the firm's cost of capital. IRR often gives too optimistic picture of the investment.
2. IRR may have multiple conflicting answers. MIRR provide one unique solution for a given project, while with IRR there may be multiple solutions for one project (when a project has different periods of positive and negative cash flows)