Question

The director of capital budgeting for Giant Inc. has identified two mutually exclusive projects, L and S, with the following expected net cash flows: Expected Net Cash Flows Year Project L Project S 0 ($100) ($100) 1 10 70 2 60 50 3 80 20 Both projects have a cost of capital of 12 percent. What is Project S's MIRR? What is Project L's MIRR?

Answer 1

	Computation of MIRR
	Year	project L	project S
	0	-100	-100
	1	10	70
	2	60	50
	3	80	20
we have to first compute the future value of the cash flow from year 1 to 3 for project L
	Year	project L	Future value
	1	10	12.544	=10*(1+12%)^2
	2	60	67.2	=60*(1+12%)^1
	3	80	80	80
	future value		159.744
	now we have to use financial calculator to compute the MIRR
	Put in calcluator
	PV		-100
	PMT		0
	FV		159.744
	N		3
	Compute I		16.90%
	therefore MIRR of L =			16.90%
we have to first compute the future value of the cash flow from year 1 to 3 for project S
	Year	project S	Future value
	1	70	87.808	=70*(1+12%)^2
	2	50	56	=50*(1+12%)^1
	3	20	20	20
	future value		163.808
	now we have to use financial calculator to compute the MIRR
	Put in calcluator
	PV		-100
	PMT		0
	FV		163.808
	N		3
	Compute I		17.88%
	therefore MIRR of S =			17.88%