MIRR
A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:
0 | 1 | 2 | 3 | 4 |
Project X | $(1,000) | $100 | $320 | $370 | $750 |
Project Y | $(1,000) | $1,000 | $110 | $50 | $55 |
The projects are equally risky, and their WACC is 13%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.
%
X:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=100/1.13+320/1.13^2+370/1.13^3+750/1.13^4
=1055.52
NPV=Present value of inflows-Present value of outflows
=1055.52-1000
=$55.52(Approx)
Y:
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=1000/1.13+110/1.13^2+50/1.13^3+55/1.13^4
=1039.49
NPV=Present value of inflows-Present value of outflows
=1039.49-1000
=$39.49(Approx)
Hence X is better having higher NPV.
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Future value of inflows=100*(1.13)^3+320*(1.13)^2+370*(1.13)+750
=1720.9977
MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1
=[1720.9977/1000]^(1/4)-1
=14.54%(Approx)
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