Question

You have just arrived at a SnappyPrints Inc., a maker of photo printers.  You are working in the Financial Planning department and have joined a team conducting capital budgeting analysis. Snappy is considering two new projects. Project Mini Printer (PMP) and Project High Speed Printer (HSP).  The WACC is 10%.

                                   0                      1                      2                      3

                                   |                      |                      |                      |

Project PMP ($    -150                   40                   75                   100

Project PHS ($)   -150                   65                   75                    85

Answer the following questions:

13.  What are the MIRR’s advantages and disadvantages as compared to the NPV?

14.  What is the payback period?  Find the discounted and regular paybacks for the Projects.

15.  What is the difference between the regular and discounted payback methods?

16.  What are the two main disadvantages of discounted payback?  Is the payback method useful in capital budgeting decisions?  Explain.

Upon further analysis, SnappyPrints believes that sales of the new High-Speed Printer would cannibalize the sales of its existing I-Phone Rapid Print Accessory by 50%, resulting in lost annual cash flow of $25.  

17. How can we define/what do we call this effect?
18. Should this effect be included in the cash flow projections?   
19. If so, which project should be accepted?  

Answer 1

13. The answer to the above questions are as follows:

The advantages and disadvantages of Modified Internal Rate of Return as compared to the Net Present Value is as follows:

1. MIRR uses two interest rates i.e, Cost of capital and reinvestment rate, whereas NPV uses only 1 discounted rate for all the future cashflows.

2. MIRR takes the negative and positive cash flows differently, whereas NPV considers the cumulative amount of the future cashflows.

Disadvantages:

1. MIRR does not take into consideration the objective of the company, whereas NPV takes that into consideration

2. MIRR is more complex and time taking to calculate as compared to NPV.