Question

MIRR unequal lives. Singing Fish Fine Foods has ​$2,090,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the​ store's deli section for additional food service. The estimated​ after-tax cash flow of this project is ​$580,000 per year for the next five years. Project 2 is updating the​ store's wine section. The estimated annual​ after-tax cash flow for this project is ​$510,000 for the next six years. The appropriate discount rate for the deli expansion is 9.4​% and the appropriate discount rate for the wine section is 8.8​%. What are the MIRRs for the Singing Fish Fine Foods​ projects? What are the MIRRs when you adjust for unequal​ lives? Do the MIRR adjusted for unequal lives change the decision based on​ MIRRs? ​Hint: Take all cash flows to the same ending period as the longest project.

A. If the appropriate reinvestment rate for the deli expansion is 9.49​%, what is the MIRR of the deli​ expansion?

B. If the appropriate reinvestment rate of the wine section is 8.8%, What is the MIRR of the wine section?

C. What is the MIRR adjusted for unequal lives of the deli expansion?

D. What is the MIRR adjusted for unequal lives of the wine section?

Answer 1

a: 10.90%

b: 10.56%

c: 9.77%

d: 9.2%

Workings: Without adjusting: Cash flows

Year	Deli	Wine
0	-2090000	-2090000
1	580000	510000
2	580000	510000
3	580000	510000
4	580000	510000
5	580000	510000
6		510000
	Deli	Wine
MIRR	10.90%	10.56%

After adjustment

Year	Deli	Wine
0	-2090000	-2090000
1	580000	510000
2	580000	510000
3	580000	510000
4	580000	510000
5	-1510000	510000
6	580000	-1580000
7	580000	510000
8	580000	510000
9	580000	510000
10	-1510000	510000
11	580000	510000
12	580000	-1580000
13	580000	510000
14	580000	510000
15	-1510000	510000
16	580000	510000
17	580000	510000
18	580000	-1580000
19	580000	510000
20	-1510000	510000
21	580000	510000
22	580000	510000
23	580000	510000
24	580000	-1580000
25	-1510000	510000
26	580000	510000
27	580000	510000
28	580000	510000
29	580000	510000
30	580000	510000

Formulae as below