Question

MIRR unequal lives. Singing Fish Fine Foods has $1,910,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the​ store's deli section for additional food service. The estimated​after-tax cash flow of this project is ​$590,000 per year for the next five years. Project 2 is updating the​ store's wine section. The estimated annual​ after-tax cash flow for this project is ​$520,000 for the next six years. The appropriate discount rate for the deli expansion is 9.3​% and the appropriate discount rate for the wine section is 8.8​%. What are the MIRRs for the Singing Fish Fine Foods​ projects? What are the MIRRs when you adjust for unequal​lives? Do the MIRR adjusted for unequal lives change the decision based on​ MIRRs? ​Hint: Take all cash flows to the same ending period as the longest project.

If the appropriate reinvestment rate for the deli expansion is 9.3​%, what is the MIRR of the deli​ expansion? _________​% ​(Round to two decimal​ places.)

If the appropriate reinvestment rate for the wine section is 8.8%, what is the MIRR of the wine​ section? ________% ​(Round to two decimal​ places.)

Based on the​ MIRR, Singing Fish Fine Foods should pick the (Wine or Deli) project. (Select One.)

What is the MIRR adjusted for unequal lives of the deli​ expansion? ________​% ​(Round to two decimal​ places.)

What is the MIRR adjusted for unequal lives of the wine​ section?________​%​ (Round to two decimal​ places.)

Based on the adjusted​ MIRR, Singing Fish Fine Foods should pick the (Wine or Deli) section project. ​(Select One.)

Does the decision​ change? (Yes or No).  (Select One)

Answer 1

		PROJECT 1 DELI SECTION
		Future value of Cash Flow after N Year
		(Cash Flow)*((1+i)^(N-t))
		i=discount Rate=9.3%=0.093
		N=5
	t	Year	1	2	3	4	5
	CF	Cash Flow	$590,000	$590,000	$590,000	$590,000	$590,000	SUM
	FV=CF*(1.093^(5-t))	Future value of Cash Flow after 5 Year	$842,040	$770,393	$704,843	$644,870	$590,000	$3,552,146
		1910000*(1+MIRR)^5=	$3,552,146
		(1+MIRR)^5=	1.86	(3552146/1910000)
		1+MIRR=1.86^(1/5)=	1.13211747
		MIRR=1.13211747-1=	0.13211747
		MIRR=	13.21%
		PROJECT 2 WINE SECTION
		Future value of Cash Flow after N Year
		(Cash Flow)*((1+i)^(N-t))
		i=discount Rate=8.8%=0.088
		N=6
	t	Year	1	2	3	4	5	6
	CF	Cash Flow	$520,000	$520,000	$520,000	$520,000	$520,000	$520,000	SUM
	FV=CF*(1.088^(6-t))	Future value of Cash Flow after 6Year	$792,771	$728,650	$669,715	$615,547	$565,760	$520,000	$3,892,443
		1910000*(1+MIRR)^6=	$3,892,443
		(1+MIRR)^6=	2.04	(3892443/1910000)
		1+MIRR=2.04^(1/6)=	1.12598209
		MIRR=1.12598209-1=	0.12598209
		MIRR=	12.60%
		BASED ON MIRR PROJECT 1(DELI SECTION )SHOULD BE SELECTED
		ADJUSTED MIRR
		Adjust the shorter project to longer life
		ADJUST PROJECT 1 to6 years Life
	t	Year	1	2	3	4	5	6
	CF	Cash Flow	$590,000	$590,000	$590,000	$590,000	$590,000	$0	SUM
	FV=CF*(1.093^(6-t))	Future value of Cash Flow after 6Year	$920,350	$842,040	$770,393	$704,843	$644,870	$0	$3,882,496
		1910000*(1+MIRR)^6=	$3,882,496
		(1+MIRR)^6=	2.03	(3882496/1910000)
		1+MIRR=2.03^(1/6)=	1.12550199
		MIRR=1.12550199-1=	0.12550199
		MIRR=	12.55%
		ADJUSTED MIRR CHANGES DECISION
		BASED ON ADJUSTED MIRR, PROJECT 2(WINE SECTION )SHOULD BE SELECTED