Question

Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives. Bellinger's WACC is 11%. 0 1 2 3 4 Project A -1,050 600 360 220 270 Project B -1,050 200 295 370 720 What is Project A's MIRR? What is Projects B MIRR?

Answer 1

A:

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=600*(1.11)^3+360*(1.11)^2+220*(1.11)+270

=1778.3346

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

=[1778.3346/1050]^(1/4)-1

=14.08%(Approx)

B:

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=200*(1.11)^3+295*(1.11)^2+370*(1.11)+720

=1767.6957

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

=[1767.6957/1050]^(1/4)-1

=13.91%(Approx)