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 $750

Project Y -$1,000 $1,000 $100 $55 $45

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)

=100/1.11+280/1.11^2+430/1.11^3+750/1.11^4

=1125.80

NPV=Present value of inflows-Present value of outflows

=1125.80-1000

=$125.80(Approx)

Y:

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

=1000/1.11+100/1.11^2+55/1.11^3+45/1.11^4

=1051.92

NPV=Present value of inflows-Present value of outflows

=1051.92-1000

=$51.92(Approx)

Hence X is better having higher NPV.

For X:

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*(1.11)^3+280*(1.11)^2+430*(1.11)+750

=1709.0511

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

=[1709.0511/1000]^(1/4)-1

=14.34%(Approx)