Question

MIRR unequal lives. Peter's Investments is looking at two project opportunities for a parcel of land the company currently owns. The first project is a? music venue, and the second project is a athletic complex. The projected cash flow of the music venue is an initial cost of $1,530,000 with cash flows over the next six years of ?$150,000 ?(year one), ?$260,000 ?(year two), $300,000 ?(years three through? five), and ?$1,730,000 ?(year six), at which point Peter plans to sell the music venue. The athletic complex has the following cash? flows: initial cost of ?$2,460,000 with cash flows over the next four years of ?$430,000 ?(years one through? three) and ?$2,890,000 ?(year four), at which point Peter plans to sell the complex. The appropriate discount rate for the music venue is 9.0?% and the appropriate discount rate for the athletic complex is 11.5?%.

The MIRR of the music venue project is: 14.23%

The MIRR of the athletic complex is : 16.3%

The MIRR of the music venue when adjusting for unequal lives is: 14.23%

The MIRR of the athletic complex when adjusting for unequal lives is: _______%

Answer 1

Cash flows for athletic complex

C0, initial cost = ?$2,460,000

C1, for year 1 = $430,000

C2, for year 2 = $430,000

C3, for year 3 = $430,000

C4, for year 4 = $2,890,000

Adjusting the shorter project (athletic complex) for unequal lives, using discount rate = 11.5% = 0.115

future value of cash flows = 430,000*(1.115)⁵ + 430,000*(1.115)⁴ + 430,000*(1.115)³ + 2,890,000*(1.115)²

= 741041.9477+ 664611.6123 + 596064.2263 + 3592920.25

= 5594638.0362

MIRR after adjusting for unequal lives = (5594638.0362/2460000)^(1/6) - 1 = 0.1467607 = 14.67607% OR 14.68% ( rounding off to 2 decimal places)