Question

You are given the following information:

	Project A	Project B
Investment	$125,000	$100,000
CF-1	$12,500	$15,000
CF-2	$15,000	$25,000
CF-3	$25,000	$20,000
CF-4	$40,000	$10,000
CF-5	$60,000	$15,000
CF-6	$70,000	$35,000
Required rate of return	10%	10%

Compute the following:
a) MIRR for Project A
b) MIRR for Project B
c) Profitability Index for Project A
d) Profitability Index for Project B

Answer 1

FV of Cash flows:

Project A: $ 125,000 has increased to $ 259,767.88

$ 259,767.88 = $ 125,000 (1+MIRR)⁶

(1+MIRR)⁶ = $ 259,767.88 / $ 125,000

= 2.0781

1+MIRR = 2.0781^1/6

= 1.1297

MIRR = 0.1297 i.e 12.97%

Project A: $ 100,000 has increased to $ 150,980.15

$ 150,980.15 = $ 100,000 (1+MIRR)⁶

(1+MIRR)⁶ = $ 150,980.15 / $ 100,000

= 1.5098

1+MIRR = 2.0781^1/6

= 1.0711

MIRR = 0.0711 i.e 07.11%

Profitability Index = PV of Cash Inflows / PV of Cash Outflows