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	$110	$300	$430	$650
Project Y	$-1,000	$1,100	$110	$50	$50

The projects are equally risky, and their WACC is 11%. 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

X:

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

=110/1.11+300/1.11^2+430/1.11^3+650/1.11^4

=1085.17

NPV=Present value of inflows-Present value of outflows

=1085.17-1000

=$85.17(Approx)

Y:

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

=1100/1.11+110/1.11^2+50/1.11^3+50/1.11^4

=1149.77

NPV=Present value of inflows-Present value of outflows

=1149.77-1000

=$149.77(Approx)

Hence Y is better having higher NPV.

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=1100*(1.11)^3+110*(1.11)^2+50*(1.11)+50

=1745.4251

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

=[1745.4251/1000]^(1/4)-1

=14.94%(Approx).