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.

Homework Answers

Answer #1

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.

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