Question

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

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 \$100 \$320 \$430 \$650 Project Y -\$1,000 \$1,000 \$100 \$50 \$50

The projects are equally risky, and their WACC is 12%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.

X:

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

=100/1.12+320/1.12^2+430/1.12^3+650/1.12^4

=1063.54

NPV=Present value of inflows-Present value of outflows

=1063.54-1000

=\$63.54(Approx)

Y:

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

=1000/1.12+100/1.12^2+50/1.12^3+50/1.12^4

=1039.94

NPV=Present value of inflows-Present value of outflows

=1039.94-1000

=\$39.94(Approx)

Hence X is better having higher NPV.

X:

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Future value of inflows=100*(1.12)^3+320*(1.12)^2+430*(1.12)+650

=\$1673.5008

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

=[1673.5008/1000]^(1/4)-1

=13.74%(Approx)

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