Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 12%. 0 1 2 3 4 Project A -1,200 650 375 240 290 Project B -1,200 250 310 390 740 What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. % Show All Feedback What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places. % Show All Feedback If the projects were independent, which project(s) would be accepted according to the MIRR method? If the projects were mutually exclusive, which project(s) would be accepted according to the MIRR method?

Answer 1

Computation of MIRR:- Project A

Year	Cash inflows	Disc @ 12%	DCF	Terminal cash inflow
1	650	(1.12)^3	1.404928	913.2032
2	375	( 1.12)^2	1.2544	470.4
3	240	(1.12)^1	1.12	268.8
4	290	(1.12)^0	1	1652.4032

We know that at Modified internal rate of return PV of terminal cash inflows is equal to the present value of the cash outflow.

1652.4032/(1+i)^4= 1200

1652.4032/1200=( 1+i)^4

1.3770026 = ( 1+i)^4

1+i = 1.08326

i = 0.08326

i = 8.326%

Therefore MIRR for Project A is 8.326%

Decision: Since MIRR is lower than WAACC, So we have to reject the project.

Computation of MIRR:- Project B

Year	Cash inflows	Disc @ 12%	DCF	Terminal cash inflow
1	250	(1.12)^3	1.404928	351.232
2	310	( 1.12)^2	1.2544	388.864
3	390	(1.12)^1	1.12	436.8
4	740	(1.12)^0	1	1176.896

We know that at Modified internal rate of return PV of terminal cash inflows is equal to the present value of the cash outflow.

1176.896/(1+i)^4= 1200

1176.896/1200=( 1+i)^4

0.980746= ( 1+i)^4

1+i= 0.99515

i = -0.00484

i = -0.4848%

The project gives the return ( negetive ) which is less than WACC, we should reject the project.

In case of mutually exclusive projects, we will select the projects whichever is giving the higher MIRR. But here in this case one project is giving the return less than WACC and another one is yielding negative return.So we should not accept any project.