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	$320	$400	$700
Project Y	-$1,000	$1,000	$90	$45	$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.

= %

Answer 1

X:

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

=100/1.09+320/1.09^2+400/1.09^3+700/1.09^4

=1165.85

NPV=Present value of inflows-Present value of outflows

=1165.85-1000

=$165.85(Approx)

Y:

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

=1000/1.09+90/1.09^2+45/1.09^3+45/1.09^4

=1059.81

NPV=Present value of inflows-Present value of outflows

=1059.81-1000

=$59.81(Approx)

Hence X is better having higher NPV.

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*(1.09)^3+320*(1.09)^2+400*(1.09)+700

=1645.6949

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

=[1645.6949/1000]^(1/4)-1

=13.26%(Approx)