What advantage does MIRR offer over traditional IRR?

MIRR, or Modified Internal Rate of Return, is designed to address one of the significant limitations of the traditional Internal Rate of Return (IRR) method, specifically regarding the reinvestment rate of cash flows. The key advantage of MIRR is that it assumes cash inflows are reinvested at a more realistic rate, often the firm's cost of capital or another rate that reflects market conditions, rather than at the internal rate of return itself.

In traditional IRR calculations, the implicit assumption is that any cash inflows generated by a project are reinvested at the project's own IRR. This can lead to overly optimistic projections, especially for projects with high IRRs, where the reinvestment assumption may not reflect true market realities. In contrast, MIRR offers a more pragmatic approach by allowing for a more realistic reinvestment rate, which tends to give a clearer picture of the project's economic viability and profitability. By doing this, MIRR helps decision-makers evaluate investments with a more accurate reflection of expected performance, ultimately aiding in better capital budgeting decisions.

The other options do not accurately capture the primary advantage of MIRR. Simplifying cash flow projections and eliminating the need for manual calculations are not specific to MIRR and could apply