Question
In: Finance
MIRR unequal lives. Grady Enterprises is looking at two project opportunities for a parcel of land...
MIRR unequal
lives.
Grady Enterprises is looking at two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. The projected cash flow of the restaurant is an initial cost of
$1 comma 410 comma 0001,410,000
with cash flows over the next six years of
$190 comma 000190,000
(year one),
$280 comma 000280,000
(year two),
$ 320 comma 000$320,000
(years three through five), and
$1 comma 730 comma 0001,730,000
(year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash flows: an initial cost of
$2 comma 340 comma 0002,340,000
with cash flows over the next four years of
$440 comma 000440,000
(years one through three) and
$3 comma 060 comma 0003,060,000
(year four), at which point Grady plans to sell the facility. The appropriate discount rate for the restaurant is
9.09.0%
and the appropriate discount rate for the sports facility is
12.012.0%.
What are the MIRRs for the Grady Enterprises projects? What are the MIRRs when you adjust for the unequal lives? Do the MIRR adjusted for unequal lives change the decision based on the MIRRs? Hint: Take all cash flows to the same ending period as the longest project.
If the appropriate reinvestment rate for the restaurant is
9.09.0%,
what is the MIRR of the restaurant project?
round to two decimal places
Solutions
Expert Solution
MIRR for Restaurant = 16.7%
MIRR for Sports = 19.19%
Workings
| Year | Restaurant | Sports |
| 0 | -1410000 | -2340000 |
| 1 | 190000 | 440000 |
| 2 | 280000 | 440000 |
| 3 | 320000 | 440000 |
| 4 | 320000 | 3060000 |
| 5 | 320000 | |
| 6 | 1730000 | |
| MIRR | 16.70% | 19.19% |
When adjusted for unequal lives
MIRR for Restaurant = 14.51%
MIRR for Sports = 16.33%
| Year | Restaurant | Sports |
| 0 | -1410000 | -2340000 |
| 1 | 190000 | 440000 |
| 2 | 280000 | 440000 |
| 3 | 320000 | 440000 |
| 4 | 320000 | 720000 |
| 5 | 320000 | 440000 |
| 6 | 320000 | 440000 |
| 7 | 190000 | 440000 |
| 8 | 280000 | 720000 |
| 9 | 320000 | 440000 |
| 10 | 320000 | 440000 |
| 11 | 320000 | 440000 |
| 12 | 1730000 | 3060000 |
| MIRR | 14.51% | 16.33% |
The decision is the same, Sports will be undertaken since it has greater MIRR.
jeff jeffy answered 6 months agoRelated Solutions
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