Question

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	$320	$400	$700
Project Y	-$1,000	$1,100	$110	$45	$55

The projects are equally risky, and their WACC is 10%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.

____ %

Answer 1

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

X:

Present value of inflows=90/1.1+320/1.1^2+400/1.1^3+700/1.1^4

=$1124.92

NPV=Present value of inflows-Present value of outflows

=$1124.92-$1000

=$124.92

Y:

Present value of inflows=1100/1.1+110/1.1^2+45/1.1^3+55/1.1^4

=$1162.28

NPV=Present value of inflows-Present value of outflows

=$1162.28-$1000

=$162.28

Hence Y is a 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=1100(1.1)^3+110(1.1)^2+45(1.1)^1+55

=$1701.7

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

=[1701.7/1000]^(1/4)-1

which is equal to

=14.21%(Approx).