Which of the following statements Is COHRECT? One defect of the IRR method is th

Question

Which of the following statements Is COHRECT? One defect of the IRR method is that It does not take account of cash flows over a project's full life. One defect of the IRR method Is that It does not take account of the time value of money. One defect of the IRR method Js that it does not take account of the cost of capital One defect of the IRR method is that It values a dollar received today the same as a dollar that will not be received until sometime in the future. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IKK itself, and that assumption is often not valid.

Explanation / Answer

44.

MIRR =( P.V. of all positive cash flow / P.V. of all negative cash flow ) ^n - 1

to calculate the MIRR of the project, we assume that the positive cash flows will be reinvested at the 10% cost of capital. so the future value of the positive cash flows is computed as

Present value of all positive cash flow =450(1.1)*2 + 450*(1.1) + 450 = 1489.5

MIRR       =(1489.52/1000)^3 - 1

    = 14%

43. e) one defect of the IRR is that it assumes that the cashflows to be received from a project can be invested at the IRR itself, and that assumption is often not valid.

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