Question

Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 9%.

	0		1		2		3		4
Project A	-1,300		700		380		200		250
Project B	-1,300		300		315		350		700

1.What is Project A's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations.

2.What is Project B's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations

Please Help!

Thank you!

Answer 1

Project A
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=(906.52)+(451.48)+(218)+(250)
=1826
Thus year 0 modified cash flow=-1300
=-1300
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1300	700	380	200	250
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	1	1.295029	1.1881	1.09	1
Discounted cash flows	-1300	0	0	0	0
Compounded cash flows	0	906.52	451.48	218	250
Modified cash flow	-1300	0	0	0	1826
Discounting factor (using MIRR)	1	1.088653	1.185165	1.290233	1.4046154
Discounted cash flows	-1300	0	0	0	1300
NPV = Sum of discounted cash flows
NPV=	4.82849E-07
MIRR is the rate at which NPV = 0
MIRR=	8.87%
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
Project B
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=(388.51)+(374.25)+(381.5)+(700)
=1844.26
Thus year 0 modified cash flow=-1300
=-1300
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1300	300	315	350	700
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	1	1.295029	1.1881	1.09	1
Discounted cash flows	-1300	0	0	0	0
Compounded cash flows	0	388.51	374.25	381.5	700
Modified cash flow	-1300	0	0	0	1844.26
Discounting factor (using MIRR)	1	1.091364	1.191076	1.299897	1.4186615
Discounted cash flows	-1300	0	0	0	1300
NPV = Sum of discounted cash flows
NPV=	7.00426E-07
MIRR is the rate at which NPV = 0
MIRR=	9.14%
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)