Question

MIRR

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	$90	$320	$370	$700
Project Y	-$1,000	$1,100	$100	$55	$50

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

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

X:

Present value of inflows=90/1.11+320/1.11^2+370/1.11^3+700/1.11^4

=$1072.45

NPV=Present value of inflows-Present value of outflows

=$1072.45-$1000

=$72.45

Y:

Present value of inflows=1100/1.11+100/1.11^2+55/1.11^3+50/1.11^4

=$1145.31

NPV=Present value of inflows-Present value of outflows

  =$1145.31-$1000

=$145.31

Hence Y is a better project having higher NPV.

We use the formula:

A=P(1+r/100)^n

where

A=future value

P=present value

r=rate of interest

n=time period.

A=1100(1.11)^3+100(1.11)^2+55(1.11)+50

=$1738.6541

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

=[1738.6541/$1000]^(1/4)-1

which is equal to

=14.83%(Approx).