Which statement is most correct?

Explanation

MIRR and NPV can conflict for mutually exclusive projects if the projects differ in size. NPV does not suffer from the multiple IRR problem.

The correct answer is option E: The MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method.

Let's break down each statement and evaluate their accuracy:

A. The MIRR method will always arrive at the same conclusion as the NPV method. This statement is incorrect. The MIRR (Modified Internal Rate of Return) method and the NPV (Net Present Value) method can sometimes lead to different conclusions. The MIRR takes into account both the cash flows generated by an investment and the reinvestment rate of the cash flows, while the NPV discounts all cash flows at the same rate, usually the required rate of return or cost of capital. The MIRR assumes that positive cash flows are reinvested at the firm's cost of capital, which is often more realistic than the assumption made by the IRR method (the internal rate of return) that all cash flows are reinvested at the project's IRR.

B. All of the statements are correct. This statement is incorrect because not all statements are correct.

C. The MIRR method can overcome the multiple IRR problem, while the NPV method cannot. This statement is true. The MIRR method is designed to overcome the multiple IRR problem that can occur with the traditional IRR method. The multiple IRR problem arises when a project has non-conventional cash flows, such as alternating positive and negative cash flows. In such cases, the IRR method can produce multiple internal rates of return, making it difficult to interpret the results. The MIRR method avoids this problem by assuming that positive cash flows are reinvested at the cost of capital and negative cash flows are financed at the firm's borrowing rate. This allows for a single rate of return, providing a more reliable measure of a project's profitability.

D. None of the statements are correct. This statement is incorrect because statement C is correct.

E. The MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method. This statement is correct. The MIRR method assumes that positive cash flows generated by a project are reinvested at the firm's cost of capital. This assumption is generally more reasonable than the IRR method's assumption that all cash flows are reinvested at the project's internal rate of return. The MIRR method recognizes that positive cash flows should be reinvested in projects with similar risk profiles, and using the cost of capital reflects the opportunity cost of investing in alternative projects. On the other hand, the IRR method's assumption can be overly optimistic and may not accurately represent real-world reinvestment opportunities.

In summary, option E is the most correct statement because the MIRR method indeed uses a more reasonable assumption about reinvestment rates compared to the IRR method, and the other statements are either incorrect or incomplete.