Question

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Two projects have the following information:

Both projects required rate of return is 10%.

Year	Project X	Project Y
0	-100	-100
1	50	20
2	30	40
3	30	40
4	30	50
5	-10	-9

A) Calculate the NPV both projects. If they are mutually exclusive, which project would you pick?

B) Calculate the MIRR of both projects using the combo method and determine which project you would pick based solely on MIRR.

C) Calculate the cross-over rate

Answer 1

A) NPV of Project A=PV of Cash Flows-Investment =50/1.1+30/1.1^2+30/1.1^3+30/1.1^4-10/1.1^5-100 =7.07
NPV of Project B=PV of Cash Flows-Investment =20/1.1+40/1.1^2+40/1.1^3+50/1.1^4-9/1.1^5-100 =9.85
Project B should be selected.
B)FV of cash flows=50*(1.1)^4+30*1.1^3+30*1.1^2+30*1.1=182.4350
PV of cash flows=100+10/1.1^5=106.2092
MIRR of Project A=(FV of cash flows/PV of Cash inflows)^(1/n)-1=(182.4350/106.2092)^(1/5)-1=11.43%

FV of cash flows B=20*(1.1)^4+40*1.1^3+40*1.1^2+50*1.1=185.9220
PV of cash flows B=100+9/1.1^5=105.5883
MIRR of Project B=(FV of cash flows/PV of Cash inflows)^(1/n)-1=(185.9220/105.5883)^(1/5)-1=11.98%

Project B should be selected.
c) Using excel sheet to calculate cross over rate

	A	B	C
	Project A	Project B	Incremental Cash flow
1	-100	-100	0
2	50	20	30
3	30	40	-10
4	30	40	-10
5	30	50	-20
6	-10	-9	-1
		Cross Over Rate	14.96%
		IRR	IRR(C1:C6)

Alternate method using Financial Calculator
CF1=0;CF2=30;CF3=-10;CF4=-10;CF5=-20;CF6=-1;CPT IRR =14.96%