Question

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 $1,500,000 with cash flows over the next six years of $170,000 ​(year one), $210,000 (year two), $280,000 ​(years three through​ five), and ​$1,720,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the following cash​ flows: an initial cost of $2,470,000 with cash flows over the next four years of ​$420,000 (years one through​ three) and $3,400,000 ​(year four), at which point Grady plans to sell the facility. The appropriate discount rate for the restaurant is 11.0​% and the appropriate discount rate for the sports facility is 13.0​%. 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.

Answer 1

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