Question

MIRR

A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:

0

1

2

3

4

Project X	-$1,000	$90	$300	$400	$650
Project Y	-$1,000	$1,000	$100	$45	$55

The projects are equally risky, and their WACC is 10.0%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places.

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

X:

Present value of inflows=90/1.1+300/1.1^2+400/1.1^3+650/1.1^4

=$1074.24

NPV=Present value of inflows-Present value of outflows

=$1074.24-$1000

=$25.26

L:

Present value of inflows=1000/1.1+100/1.1^2+45/1.1^3+55/1.1^4

=$1063.11

NPV=Present value of inflows-Present value of outflows

=$1063.11-$1000

=$63.11

Hence L is the better project.

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=1000*(1.1)^3+100*(1.1)^2+45*(1.1)^1+55

=$1556.5

MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1]

=[1556.5/1000]^(1/4)-1

=11.70%(Approx).