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, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%.

	0		1		2		3		4
Project A	-1,110		790		350		250		300
Project B	-1,110		390		285		400		750

What is Project A’s IRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is Project B's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

part two

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	$370	$700
Project Y	-$1,000	$900	$100	$55	$50

The projects are equally risky, and their WACC is 11%. 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

Project A
IRR is the rate at which NPV =0
IRR	0.248006113
Year	0	1	2	3	4
Cash flow stream	-1110	790	350	250	300
Discounting factor	1	1.248006	1.557519	1.943794	2.4258662
Discounted cash flows project	-1110	633.0097	224.7163	128.6145	123.66716
NPV = Sum of discounted cash flows
NPV Project A =	0.007688669
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	24.80%
Project B
IRR is the rate at which NPV =0
IRR	0.206822808
Year	0	1	2	3	4
Cash flow stream	-1100	390	285	400	750
Discounting factor	1	1.206823	1.456421	1.757642	2.121163
Discounted cash flows project	-1100	323.1626	195.6851	227.5776	353.57962
NPV = Sum of discounted cash flows
NPV Project B =	0.004935306
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	20.68%

Project A
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(136.76)+(394.27)+(410.7)+(700)
=1641.73
Thus year 0 modified cash flow=-1000
=-1000
Discount rate	0.11
Year	0	1	2	3	4
Cash flow stream	-1000	100	320	370	700
Discount factor	1	1.11	1.2321	1.367631	1.5180704
Compound factor	100.00%	1.367631	1.2321	1.11	1
Discounted cash flows	-1000	0	0	0	0
Compounded cash flows	-0.001	136.76	394.27	410.7	700
Modified cash flow	-1000	0	0	0	1641.73
Discounting factor (using MIRR)	1	1.131945	1.2813	1.450362	1.6417299
Discounted cash flows	-1000	0	0	0	1000
NPV = Sum of discounted cash flows
NPV=	4.13617E-05
MIRR is the rate at which NPV = 0
MIRR=	13.19%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor
Project B
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(1230.87)+(123.21)+(61.05)+(50)
=1465.13
Thus year 0 modified cash flow=-1000
=-1000
Discount rate	0.11
Year	0	1	2	3	4
Cash flow stream	-1000	900	100	55	50
Discount factor	1	1.11	1.2321	1.367631	1.5180704
Compound factor	1	1.367631	1.2321	1.11	1
Discounted cash flows	-1000	0	0	0	0
Compounded cash flows	-0.001	1230.87	123.21	61.05	50
Modified cash flow	-1000	0	0	0	1465.13
Discounting factor (using MIRR)	1	1.100192	1.210423	1.331698	1.4651231
Discounted cash flows	-1000	0	0	0	1000.0047
NPV = Sum of discounted cash flows
NPV=	0.004697425
MIRR is the rate at which NPV = 0
MIRR=	10.02%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)