Question

MIRR and NPV

Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:

Year	X		Y
0	-$5,000		-$5,000
1	1,000		4,500
2	1,500		1,500
3	2,000		1,000
4	4,000		500

The projects are equally risky, and their cost of capital is 13%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects' MIRRs. Do not round intermediate calculations. Round your answers to two decimal places.

Project X:   %

Project Y:   %

Which project has the higher MIRR?

-Select-Project XProject YItem 3 has the higher MIRR.

Answer 1

Project X Cash flows Fv @ 13% Future value Year $1,000 $1,442.90 1.44 $1,500 $2,000 $1,915.35 2 1.28 $2,260.00 $4,000.00 1.13 3 $4,000 1.00 $9,618.25 Terminal value present value of cash outflow $5,000 17.77% MIRR (Terminal value of cash inflows/pv of out flow)^(1/t)-1 = (9618.25/5000)^(1/4)-1

Project Y Cash flows Fv @ 13% Future value Year $4,500 $6,493.04 $1,915.35 1 1.44 $1,500 2 1.28 $1,000 $1,130.00 3 1.13 $500 $500.00 4 1.00 $10,038.39 Terminal value present value of cash outflow $5,000 19.03% MIRR = (Terminal value of cash inflows/pv of out flow)^(1/t)-1 = (10038.39/5000)^(1/4)-1

Accept project Y as having high MIRR