Question

Colorado Springs Technology must choose between two methods of producing a new product. The initial costs and year-end cash flow are as follows:

Year	0	1	2	3	4	5
Method A	--$1,000,000	210,000	250,000	300,000	525,000	600,000
Method B	--$1,000,000	410,000	375,000	475,000	225,000	195,000

1. The company’s WACC is 10 percent. Calculate the NPV, IRR & MIRR for each method.   

Answer 1

Method A:

Calculation of NPV:

NPV = -$1,000,000 + $210,000/1.10 + $250,000/1.10^2 + $300,000/1.10^3 + $525,000/1.10^4 + $600,000/1.10^5
NPV = $354,049.96

Calculation of IRR:

NPV = -$1,000,000 + $210,000/(1+i) + $250,000/(1+i)^2 + $300,000/(1+i)^3 + $525,000/(1+i)^4 + $600,000/(1+i)^5
0 = -$1,000,000 + $210,000/(1+i) + $250,000/(1+i)^2 + $300,000/(1+i)^3 + $525,000/(1+i)^4 + $600,000/(1+i)^5

Using financial calculator, i = 20.62%

IRR = 20.62%

Calculation of MIRR:

Future Value of Cash Inflows = $210,000*1.10^4 + $250,000*1.10^3 + $300,000*1.10^2 + $525,000*1.10 + $600,000
Future Value of Cash Inflows = $2,180,711

MIRR = (Future Value of Cash Inflows / Present Value of Cash Outflows)^(1/Period) - 1
MIRR = ($2,180,711 / $1,000,000)^(1/5) - 1
MIRR = 2.180711^(1/5) - 1
MIRR = 1.1687 - 1
MIRR = 0.1687 or 16.87%

Method B:

Calculation of NPV:

NPV = -$1,000,000 + $410,000/1.10 + $375,000/1.10^2 + $475,000/1.10^3 + $225,000/1.10^4 + $195,000/1.10^5
NPV = $314,276.84

Calculation of IRR:

NPV = -$1,000,000 + $410,000/(1+i) + $375,000/(1+i)^2 + $475,000/(1+i)^3 + $225,000/(1+i)^4 + $195,000/(1+i)^5
0 = -$1,000,000 + $410,000/(1+i) + $375,000/(1+i)^2 + $475,000/(1+i)^3 + $225,000/(1+i)^4 + $195,000/(1+i)^5

Using financial calculator, i = 23.21%

IRR = 23.21%

Calculation of MIRR:

Future Value of Cash Inflows = $410,000*1.10^4 + $375,000*1.10^3 + $475,000*1.10^2 + $225,000*1.10 + $195,000
Future Value of Cash Inflows = $2,116,656

MIRR = (Future Value of Cash Inflows / Present Value of Cash Outflows)^(1/Period) - 1
MIRR = ($2,116,656 / $1,000,000)^(1/5) - 1
MIRR = 2.116656^(1/5) - 1
MIRR = 1.1618 - 1
MIRR = 0.1618 or 16.18%