Which of the following is NOT a valid method of modifying cash flows to produce

Question

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR? A. Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. B. Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project?s lifetime. C. Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. D. Discount all of the negative cash flows to time O and leave the positive cash flows alone.

Explanation / Answer

Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime (which is Option B)

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Details Provided Below:

MIRR is generally calculated for projects having more than one IRR (Internal Rate of Return). MIRR is the discount rate that sets the net present value (NPV) of modified cash flows equal to 0. The 3 approaches that are used to calculate MIRR are discounting approach, reinvestment approach and combination approach.

Option A in the above question represents reinvestment approach.

Option C in the above question represents the combination approach.

Option D in the above question represents the discounting approach.

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