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 $280 $400 $700 Project Y -$1,000 $1,100 $110 $45 $50 The projects are equally risky, and their WACC is 11%. 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

Project X:

Cash Flows:
Year 0 = -$1,000
Year 1 = $110
Year 2 = $280
Year 3 = $400
Year 4 = $700

Present Value of Cash Outflow = $1,000

Future Value of Cash Inflow = $110*1.11^3 + $280*1.11^2 + $400*1.11 + $700
Future Value of Cash Inflow = $1,639.43

MIRR = (Future Value of Cash Inflow / Present Value of Cash Outflow)^(1/n) - 1
MIRR = ($1,639.43 / $1,000)^(1/4) - 1
MIRR = 1.63943^(1/4) - 1
MIRR = 1.1315 - 1
MIRR = 0.1315 = 13.15%

Project Y:

Cash Flows:
Year 0 = -$1,000
Year 1 = $1,100
Year 2 = $110
Year 3 = $45
Year 4 = $50

Present Value of Cash Outflow = $1,000

Future Value of Cash Inflow = $1,100*1.11^3 + $110*1.11^2 + $45*1.11 + $50
Future Value of Cash Inflow = $1,739.88

MIRR = (Future Value of Cash Inflow / Present Value of Cash Outflow)^(1/n) - 1
MIRR = ($1,739.88 / $1,000)^(1/4) - 1
MIRR = 1.73988^(1/4) - 1
MIRR = 1.1485 - 1
MIRR = 0.1485 = 14.85%

So, Project Y will maximize shareholders value.