Question

Q1.

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Enter your answer rounded to two decimal places. Do not enter % in the answer box. For example, if your answer is 0.12345 or 12.345% then enter as 12.35 in the answer box.
WACC:		11%
Year:		0		1	2	3	4
Cash flows:		-$875		$350	$375	$400	$425

Q2.

Anderson Associates is considering two mutually exclusive projects that have the following cash flows:

                        Project A                     Project B

Year                Cash Flow                   Cash Flow

0                    -$11,000                      -$9,000

1                       1,500                          6,000

2                       3,000                           4,000

3                       5,000                           3,000

4                       9,000                           2,000

At what cost of capital do the two projects have the same net present value? (That is, what is the crossover rate?)

Answer 1

Discount rate	11.000%
Year	0	1	2	3	4
Cash flow stream	-875.000	350.000	375.000	400.000	425.000
Discount factor	1.000	1.110	1.232	1.368	1.518
Compound factor	1.000	1.368	1.232	1.110	1.000
Discounted cash flows	-875.000	0	0	0	0
Compounded cash flows	-0.001	478.67	462.04	444	425
Modified cash flow	-875.000	0	0	0	1809.710
Discounting factor (using MIRR)	1.000	1.199	1.438	1.725	2.068
Discounted cash flows	-875.000	0.000	0.000	0.000	875.000
NPV = Sum of discounted cash flows
NPV=	0.00
MIRR is the rate at which NPV = 0
MIRR=	19.92%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor

Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(478.67)+(462.04)+(444)+(425)
=1809.71
Thus year 0 modified cash flow=-875
=-875

2

IRR of difference of cash flows of the two project will give us the cross over rate

Project A - B
IRR is the rate at which NPV =0
IRR	6.45%
Year	0	1	2	3	4
Cash flow stream	-2000.000	-4500.000	-1000.000	2000.000	7000.000
Discounting factor	1.000	1.064	1.133	1.206	1.284
Discounted cash flows project	-2000.000	-4227.398	-882.513	1658.104	5451.807
NPV = Sum of discounted cash flows
NPV Project A - B =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	6.45% = cross over rate