Compare the decision criteria for IRR and MIRR in the context of capital budgeting.
Understand the Problem
The question is asking to compare the decision criteria for MIRR (Modified Internal Rate of Return) and IRR (Internal Rate of Return) in the context of capital budgeting. It presents four options, asking for an evaluation of which statement regarding MIRR and IRR is correct.
Answer
A. MIRR is preferred over IRR when capital rationing is involved.
The correct answer is A. MIRR is preferred over IRR when capital rationing is involved.
Answer for screen readers
The correct answer is A. MIRR is preferred over IRR when capital rationing is involved.
More Information
MIRR is often preferred when capital rationing is a factor because it accounts for different financing and reinvestment rates, providing a more realistic project evaluation than IRR.
Tips
A common mistake is assuming IRR is always superior because it’s widely known. However, IRR can give misleading results when comparing mutually exclusive projects.
