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 9%.

	0		1		2		3		4
Project A	-1,300		650		385		280		330
Project B	-1,300		250		320		430		780

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

%

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

%

Answer 1

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=(841.77)+(457.42)+(305.2)+(330)
=1934.39
Thus year 0 modified cash flow=-1300
=-1300
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1300	650	385	280	330
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	100.00%	1.295029	1.1881	1.09	1
Discounted cash flows	-1300	0	0	0	0
Compounded cash flows	-0.000769231	841.77	457.42	305.2	330
Modified cash flow	-1300	0	0	0	1934.39
Discounting factor (using MIRR)	1	1.10446	1.219833	1.347257	1.4879923
Discounted cash flows	-1300	0	0	0	1300
NPV = Sum of discounted cash flows
NPV=	3.55549E-06
MIRR is the rate at which NPV = 0
MIRR=	10.45%
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=(323.76)+(380.19)+(468.7)+(780)
=1952.65
Thus year 0 modified cash flow=-1300
=-1300
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1300	250	320	430	780
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	1	1.295029	1.1881	1.09	1
Discounted cash flows	-1300	0	0	0	0
Compounded cash flows	-0.000769231	323.76	380.19	468.7	780
Modified cash flow	-1300	0	0	0	1952.65
Discounting factor (using MIRR)	100.00%	1.107058	1.225577	1.356784	1.5020385
Discounted cash flows	-1300	0	0	0	1300
NPV = Sum of discounted cash flows
NPV=	4.76412E-06
MIRR is the rate at which NPV = 0
MIRR=	10.71%
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)