Question

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.

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.