Question

# Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows...

Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:

 Year X Y 0 -\$5,000 -\$5,000 1 1,000 4,500 2 1,500 1,500 3 2,000 1,000 4 4,000 500

The projects are equally risky, and their cost of capital is 11%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRs. Do not round intermediate calculations. Round your answers to two decimal places.

Project X:   %

Project Y:   %

Which project has the higher MIRR?

-Select-Project XProject YItem 3 has the higher MIRR.

MIRR is calculated as follows,

MIRR =((FV of positive cash flows/PV of negative cash flows)(1/n))-1

Where,

FV of positive cash flows at reinvest rate

PV of negative cash flows at finance rate

n means no. of periods

 Year X Y FV factor @ 11% PV factor @ 11% FV of cash flows of X FV of cash flows of Y PV of cash flows of X PV of cash flows of Y 0 (5,000.00) (5,000.00) 1.52 1.00 - - (5,000.00) (5,000.00) 1 1,000.00 4,500.00 1.37 0.90 1,367.63 6,154.34 - - 2 1,500.00 1,500.00 1.23 0.81 1,848.15 1,848.15 - - 3 2,000.00 1,000.00 1.11 0.73 2,220.00 1,110.00 - - 4 4,000.00 500.00 1.00 0.66 4,000.00 500.00 - - Total 9,435.78 9,612.49 (5,000.00) (5,000.00)

Project X

MIRR =((FV of positive cash flows/PV of negative cash flows)(1/n))-1

MIRR =((9,435.78/5,000)(1/4))-1

MIRR =17.21%

Project Y

MIRR =((FV of positive cash flows/PV of negative cash flows)(1/n))-1

MIRR =((9,612.49/5,000)(1/4))-1

MIRR =17.75%

Which project has the higher MIRR

Project Y has highest MIRR.So Project Y should be selected.