Question

A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:

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1

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4

Project X	-$1,000	$100	$300	$430	$750
Project Y	-$1,000	$1,100	$100	$50	$45

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

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Answer 1

NPV of Project X =PV of Cash Flows-Initial Investment
=100/(1+10%)+300/(1+10%)^2+430/(1+10%)^3+750/(1+10%)^4-1000=174.17

NPV of Project Y =PV of Cash Flows-Initial Investment
=1100/(1+10%)+100/(1+10%)^2+50/(1+10%)^3+45/(1+10%)^4-1000=150.95

Project X has higher NPV , hence it maximizes shareholder value.

MIRR of Project X
FV of cash inflows =100*(1+10%)^3+300*(1+10%)^2+430*(1+10%)+750 =1719.10
PV of cash outflows =1000
MIRR =(FV of Cash inflows/PV of Cash outflows)^(1/n)-1 =(1719.10/1000)^(1/4)-1 =14.51%