Question

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.

	0	1	2	3	4
Project A	-1,500	700	435	270	320
Project B	-1,500	300	370	420	770

What is Project A's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations.

What is Project B's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

MIRR = (Future Value of positive cashflow/Initial outlay)   -1

Future Value of positive cashflow can be calculated as

CF1*(1+r)^n-1 + CF2*(1+r)^n-2 + ...... + CFn

Project A

Future Value of positive cashflow = 700*1.1^3 + 435*1.1^2 + 270*1.1 + 320

=931.7+ 526.35 +297+ 320

= 2075.05

MIRR = (2075.05/1500)^(1/4) - 1

= 1.38336666667^(1/4) - 1

= 1.08451191236-1

= 8.45%

Project B

Future Value of positive cashflow = 300*1.1^3 + 370*1.1^2 + 420*1.1 + 770

=399.3+ 447.7 +462+ 770

= 2079

MIRR = (2079/1500)^(1/4) - 1

= 1.386^(1/4) - 1

= 1.08502765505-1

= 8.50%