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 $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.

Homework Answers

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).

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