Quantitative Problem Bellinger Industries is considering two

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 11%.

0 1 2 3 4

Project A -1,150 650 440 260 310

Project B -1,150 250 375 410 760

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

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

Solution

Project A -1,150 650 440 260 310
MIRR of Project A = ( FV of Cash inflows /PV of Cash outflows)^1/4 - 1  
FV of Cash flows = 650 * ( 1+11%)³ + 440 * ( 1+11%)² + 260 * ( 1+11%)¹ + 310 * ( 1+11%)⁰ = 2029.68
MIRR of Project A = ( FV of Cash inflows /PV of Cash outflows)^1/4 - 1 = (2029.68/1150)^0.25 - 1 = 15.26%

Project B -1,150 250 375 410 760
FV of Cash flows = 250 * ( 1+11%)³ + 375 * ( 1+11%)² + 410 * ( 1+11%)¹ + 760 * ( 1+11%)⁰ = 2019.045
MIRR of Project A = ( FV of Cash inflows /PV of Cash outflows)^1/4 - 1 = (2019.045/1150)^0.25 - 1 = 15.11%

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