Question

Capital Budgeting Methods

Project S has a cost of $11,000 and is expected to produce benefits (cash flows) of $3,400 per year for 5 years. Project L costs $23,000 and is expected to produce cash flows of $6,900 per year for 5 years.

Calculate the two projects' MIRRs, assuming a cost of capital of 14%. Round your answers to two decimal places.

Project S	%
Project L	%

Answer 1

MIRR = n[(terminal value of cash flow) / Initial Investment] - 1 or

[(terminal value of cash flow) / Initial Investment]^1/n

So, the terminal value of cash flows :

Year	CF - project S	CF - project L	FV factor (14%)	Terminal value - project S	Terminal value - project L
0	(11000)	(23000)
1	3400	6900	1.14^(5-1) = 1.6890	5742.46	11654.10
2	3400	6900	1.14^(5-2) = 1.4815	5037.10	10222.35
3	3400	6900	1.30	4420	8970
4	3400	6900	1.14	3876	7866
5	3400	6900	1	3400	6900
			Total =	22475.56	45612.45

MIRR = n[(terminal value of cash flow) / Initial Investment] - 1 or

[(terminal value of cash flow) / Initial Investment]^1/n

MIRR of project S = [22475.56/11000]^1/5 - 1 = 1.1536 - 1 = 15.36%

MIRR of project L = [45612.45/23000]^1/5 - 1 = 1.1468 - 1 = 14.68%