Question

question 12 (5 points) listen which of the following statements is correct? assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a projects mirr is always greater than its regular irr. a projects mirr is always less than its regular irr. if a projects irr is greater than its wacc, then the mirr will be less than the irr. if a projects irr is greater than its wacc, then the mirr will be greater than the irr. to find a projects mirr, we compound cash inflows at the irr and then discount the terminal value back to t = 0 at the wacc.

Explanation:

To determine the correct statement, we analyze each option:

• Option 1: MIRR is not always greater than IRR. For normal cash flows (outflow then inflows), when IRR > WACC, MIRR < IRR. So this is incorrect.
• Option 2: MIRR is not always less than IRR. If IRR < WACC, MIRR could be greater, but for normal cash flows with IRR > WACC (common case), MIRR < IRR. But the "always" makes this wrong as there are cases (IRR < WACC) where MIRR might be higher. However, focusing on normal cash flows (one outflow, then inflows) and typical WACC vs IRR (IRR > WACC for viable projects), but the "always" is incorrect. But let's check other options.
• Option 3: For a project with normal cash flows (outflow then inflows) and IRR > WACC (viable project), MIRR is calculated by compounding inflows at WACC (or reinvestment rate) and discounting the terminal value at WACC. The regular IRR assumes reinvestment at IRR, which is higher than WACC (since IRR > WACC here). So compounding at WACC (lower rate than IRR) leads to a lower terminal value, hence a lower MIRR than IRR. So if IRR > WACC, MIRR < IRR. This is correct.
• Option 4: As explained, when IRR > WACC, MIRR is less than IRR (because reinvestment at WACC < IRR, leading to lower terminal value and thus lower MIRR). So this is incorrect.
• Option 5: To find MIRR, we compound cash inflows at the WACC (or reinvestment rate, often WACC) and discount the terminal value back to t=0 at the WACC. Compounding at IRR is for calculating IRR, not MIRR. So this is incorrect.

Answer:

C. If a project's IRR is greater than its WACC, then the MIRR will be less than the IRR.