Question

A firm is considering two mutually exclusive projects, X and Y, with the following cash flows

.

Project X	-$1,000	$100	$280	$430	$650
Project Y	-$1,000	$900	$100	$50	$55

The projects are equally risky, and their WACC is 8%. 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

The  project that maximizes shareholder value is the one with the higher Net present Value.

Net present Value of Project X = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 100*1/(1.08)^1+280*1/(1.08)^2+430*1/(1.08)^3+650*1/(1.08)^4]-1000

= $ 1,151.764730233460 - 1000

= $ 151.76

Net present Value of Project Y = Present Value of Cash Inflows - Present Value of Cash Outflows

= [ 900*1/(1.08)^1+100*1/(1.08)^2+50*1/(1.08)^3+55*1/(1.08)^4]-1000

= - $ 0.81

Project X is the better project hence MIRR of Project X would be computed.

MIRR=[Future value of inflows/Present value of outflow]^(1/n)-1

= [ 1151.764730233460/1000]^(1/4)-1

= 3.60%

Answer = 3.60%