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	$100	$280	$430	$700
Project Y	-$1,000	$1,000	$90	$45	$55

The projects are equally risky, and their WACC is 8%. 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)

=100/1.08+280/1.08^2+430/1.08^3+700/1.08^4

=1188.52

NPV=Present value of inflows-Present value of outflows

=1188.52-1000

=$188.52(Approx)

Y:

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

=1000/1.08+90/1.08^2+45/1.08^3+55/1.08^4

=1079.24

NPV=Present value of inflows-Present value of outflows

=1079.24-1000

=$79.24(Approx)

Hence X 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=100*(1.08)^3+280*(1.08)^2+430*(1.08)+700

=1616.9632

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

=[1616.9632/1000]^(1/4)-1

=12.77%(Approx).