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 | $320 | $370 | $650 |
Project Y | -$1,000 | $1,100 | $110 | $55 | $45 |
The projects are equally risky, and their WACC is 9%. What is the MIRR of the project that maximizes shareholder value? Do not round intermediate calculations. Round your answer to two decimal places.
%=
X:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=100/1.09+320/1.09^2+370/1.09^3+650/1.09^4
=1107.26
NPV=Present value of inflows-Present value of outflows
=1107.26-1000
=$107.26(Approx)
Y:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=1100/1.09+110/1.09^2+55/1.09^3+45/1.09^4
=1176.11
NPV=Present value of inflows-Present value of outflows
=1176.11-1000
=$176.11(Approx)
Hence Y is better having higher NPV
Y:
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*(1.09)^3+110*(1.09)^2+55*(1.09)+45
=1660.1729
MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1
=[1660.1729/1000]^(1/4)-1
=13.51%(Approx)
Get Answers For Free
Most questions answered within 1 hours.