Question

MIRR unequal lives. Singing Fish Fine Foods has ​$2 comma 020 comma 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 ​$620 comma 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 ​$490 comma 000 for the next six years. The appropriate discount rate for the deli expansion is 9.7​% and the appropriate discount rate for the wine section is 9.0​%. 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 9.7​%, what is the MIRR of the deli​ expansion?

Answer 1

PART 1: Unequal lives

Project 1 has the higher MIRR and will be selected.

Year	Project 1	Project 2
0.00	-2020000	-2020000
1	620000	490000
2	620000	490000
3	620000	490000
4	620000	490000
5	620000	490000
6		490000
MIRR	13.25%	10.55%

PART 2: Equal lives= 30 years (LCM of 5 and 6)

Project 1 has the higher MIRR and will be selected.

Year	Project 1	Project 2
0.00	-2020000	-2020000
1	620000	490000
2	620000	490000
3	620000	490000
4	620000	490000
5	-1400000	490000
6	620000	-1530000
7	620000	490000
8	620000	490000
9	620000	490000
10	-1400000	490000
11	620000	490000
12	620000	-1530000
13	620000	490000
14	620000	490000
15	-1400000	490000
16	620000	490000
17	620000	490000
18	620000	-1530000
19	620000	490000
20	-1400000	490000
21	620000	490000
22	620000	490000
23	620000	490000
24	620000	-1530000
25	-1400000	490000
26	620000	490000
27	620000	490000
28	620000	490000
29	620000	490000
30	620000	490000
MIRR	10.40%	9.97%

WORKINGS