A firm is considering two mutually exclusive projects X and

A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:

$50

The projects are equally risky, and their WACC is 11.0%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places.

Solution

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

X:

Present value of inflows=100/1.11+320/1.11^2+400/1.11^3+750/1.11^4
=$1136.33

NPV=Present value of inflows-Present value of outflows

=$1136.33-$1000

=$136.33(Approx).

Y:

Present value of inflows=1100/1.11+100/1.11^2+50/1.11^3+50/1.11^4

=$1141.65

NPV=Present value of inflows-Present value of outflows

=$1141.65-$1000

=$141.65(Approx).

Hence Y is a better project 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.

Hence

A=1100*(1.11)^3+100*(1.11)^2+50*(1.11)+50

=$1733.1041

MIRR=[Future value of inflows/Present value of outflows]^(1/time period)-1

=[1733.1041/1000]^(1/4)-1

which is equal to

=14.74%(Approx).