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	$400	$750
Project Y	-$1,000	$900	$110	$45	$55

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.

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Answer 1

Basically MIRR is calculated using the following equation:

Numerator is the FV of all the CF at the nth period i.e. the last period of the project reinvested at WACC of 11%

Therefore to calculate the MIRR for project A following steps will be required:

Similarly to calculate the MIRR for project B following steps will be required:

Project with the higher MIRR, maximizes the shareholder's value and that is project A with an MIRR of 13.54%