Question

A firm is considering two mutually exclusive projects, X and Y, with the following cash flows: 0 1 2 3 4 Project X -$1,000 $110 $300 $400 $700 Project Y -$1,000 $900 $100 $55 $45 The projects are equally risky, and their WACC is 10%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.

Answer 1

X:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=110/1.1+300/1.1^2+400/1.1^3+700/1.1^4

=1126.57

NPV=Present value of inflows-Present value of outflows  

=1126.57-1000

=$126.57(Approx)

Y:

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=900/1.1+100/1.1^2+55/1.1^3+45/1.1^4

=972.88

NPV=Present value of inflows-Present value of outflows  

=972.88-1000

=$-27.12(Approx)(Negative)

Hence X must be selected having higher NPV.

X:

We use the formula:  
A=P(1+r/100)^n
where   
A=future value
P=present value  
r=rate of interest
n=time period.

Future value of inflows=110*(1.1)^3+300*(1.1)^2+400*(1.1)+700

=$1649.41

MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1   

=[1649.41/1000]^(1/4)-1

=13.33%(Approx)