Question

4.         Find the MIRR of each investment using the WACC as the discount rate.

You currently own and operate a bar in Chicago called the Big Tap. Up until now you have only served beer and hard alcohol to your customers (no food), and all liquor served has been purchased through a distributor. Business has been good, but you have just bought and moved into a new building and are looking to further expand the bar's business. The new building you are now located in has more space than the bar's previous location and the basement of the new building is currently unfinished. You have come up with two different investment possibilities: Investment Alternative 1: Microbrewery Renovate the basement into a microbrewery and begin brewing your own beer for sale at the bar. Investment Alternative 2: Kitchen Renovate the basement into a kitchen and begin to serve a full menu of food at the bar. Information: You have estimated that both projects will require an initial investment of $100,000 for renovations and new equipment purchases. You have found a local bank that will lend 70% of the initial investment, financed over 5 years at 6% per year. You can assume that the entire initial investment will be depreciated using the straight-line method over a 10-year period. You expect both investments to generate additional revenues of $50,000 and additional expenses of $32,000 in the first year. Both the revenues and expenses directly related to the new investments are expected to grow at a rate of 2% each year.

Answer 1

Calculation of WACC
Fund Proportion
Equity	30%
Debt	70%
Interest rate on debt	6%
Return on Equity	40%
Tax rate	25%
WACC	15.15%

WACC = [ 40% x 30% ] + [{6% x (1-25%)} x 70%]

MIRR Calculation

MIRR = (Future Value of Cash Flows / Initial Investment)^1/time - 1

Micorbrewery
Year	Inflows	Outflows	Other Cash Effects	Depreciation	Loan Payment	Loan Interest	Taxable Income	Taxes	NATCF	[email protected]%	PV	FVF	FV Inflows
0	0	100000	0	10000	0	0	0	0	-100000	1.0000	-100000.00
1	50000	32000	-3000	10000	14000	4200	800	200	10600	0.8684	9205.38	4.0986	43445.55
2	51000	32640	-3030	10000	14000	3360	1970	493	11478	0.7542	8656.04	3.5594	40852.89
3	52020	33293	-3060	10000	14000	2520	3147	787	12360	0.6550	8095.30	3.0911	38206.40
4	53060	33959	-3091	10000	14000	1680	4331	1083	13248	0.5688	7535.27	2.6844	35563.31
5	54122	34638	-3122	10000	14000	840	5522	1380	14141	0.4939	6985.14	2.3312	32966.92
6	55204	35331	-3153	10000	0	0	6720	1680	15040	0.4290	6451.69	2.0245	30449.26
7	56308	36037	-3185	10000	0	0	7086	1772	15315	0.3725	5705.10	1.7581	26925.66
8	57434	36758	-3216	10000	0	0	7460	1865	15595	0.3235	5045.13	1.5268	23810.90
9	58583	37493	-3249	10000	0	0	7841	1960	15881	0.2809	4461.71	1.3260	21057.41
10	59755	38243	-3281	10000	0	0	8231	2058	16173	0.2440	3945.94	1.1515	18623.16
													311901.47
					70000							MIRR	12.05%

Kitchen
Year	Inflows	Outflows	Other Cash Effects	Depreciation	Loan Payment	Loan Interest	Taxable Income	Taxes	NATCF	[email protected]%	PV	FVF	FV Inflows
0	0	100000	0	10000	0	0	0	0	-100000	1.0000	-100000.00
1	50000	32000	3000	10000	14000	4200	6800	1700	15100	0.8684	13113.33	4.0986	61889.41
2	51000	32640	3030	10000	14000	3360	8030	2008	16023	0.7542	12083.77	3.5594	57030.31
3	52020	33293	3060	10000	14000	2520	9268	2317	16951	0.6550	11101.81	3.0911	52395.89
4	53060	33959	3091	10000	14000	1680	10513	2628	17884	0.5688	10172.34	2.6844	48009.15
5	54122	34638	3122	10000	14000	840	11766	2941	18824	0.4939	9298.15	2.3312	43883.38
6	55204	35331	3153	10000	0	0	13026	3257	19770	0.4290	8480.47	2.0245	40024.27
7	56308	36037	3185	10000	0	0	13455	3364	20092	0.3725	7484.58	1.7581	35324.06
8	57434	36758	3216	10000	0	0	13893	3473	20420	0.3235	6605.94	1.5268	31177.28
9	58583	37493	3249	10000	0	0	14338	3585	20754	0.2809	5830.73	1.3260	27518.59
10	59755	38243	3281	10000	0	0	14793	3698	21095	0.2440	5146.72	1.1515	24290.36
													421542.70
												MIRR	15.47%