Question

10-11. Your company is considering two mutually exclusive projects, J and K, whose costs and cash flows are shown below:

Year	J	K
0	$(5,000)	$(5,000)
1	1,000	4,500
2	1,500	1,500
3	2,000	1,000
4	4,000	500

The projects are equally risky, and their cost of capital is 12%. You must make a recommendation, and you must base it on the modified IRR (MIRR). What is the MIRR of the better project?

Answer 1

The Modified Internal Rate of return has a reinvestment assumption that the cash flows are re invested at the cost of capital ,rather than at the IRR(which is the assumption for IRR method)

The MIRR can be determined using the excel formula =MIRR()

The Discount rate =12%

For Project J

The MIRR can be determined using the formula =MIRR(B2:B6,12%,12%) we get MIRR as 17.49%

For Project K

The MIRR can be determined using the formula =MIRR(C2:C6,12%,12%) we get MIRR as 18.39%

Project K is the better project with an MIRR of 18.39%