Question

Charlestown Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable.

WACC:	9.00%
	0	1	2	3	4
CFS	-$2,000	$950	$950	$950	$950
CFL	-$9,000	$3,200	$3,200	$3,200	$3,200

1. If the decision is made by choosing the project with the higher IRR, how much value will be forgone?
2. What is the payback period for Project S?
3. What is the discounted payback period for Project L?
4. What is the cross-over rate?
5. What is MIRR for project S?

Answer 1

The IRR of each project is calculated using IRR function in Excel

The NPV of each project is calculated using NPV function in Excel with 9% discount rate (WACC)

Project L has the higher IRR. By choosing Project L, foregone value = NPV of Project L - NPV of Project S = $1,367 - $1,078 = $289

Payback period = time taken for cumulative cash flows to equal zero

Payback period of Project S = 2 + (100 / 950) = 2.11 years

Discounted Payback period = time taken for discounted cumulative cash flows to equal zero (discount rate = WACC = 9%)

Discounted Payback period of Project L = 3 + 900 / 2,267 = 3.4 years

Cross over rate is the IRR of incremental cash flows

Crossover rate is 11%

MIRR is calculated using MIRR function in Excel

the finance rate and reinvestment rate are the WACC , which is 9%

MIRR is 21%