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.

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