MIRR A firm is considering two mutually exclusive projects X

MIRR

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

The projects are equally risky, and their WACC is 12%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places.

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Solution

0 1 2 3 4 Project X -1000 110 320 400 650 Project Y -1000 900 100 55 45 Let us first calculate IRR for both the projects Assuming IRR is 13.9055 Year Cashflow project X Discounting factor @ 13.9055% Present Value Discounting factor @12% Present Value 0 -1000 1         -1,000.00 1 1 110 0.877920733                 96.57 0.892857         98.21 2 320 0.770744813               246.64 0.797194      255.10 3 400 0.67665285               270.66 0.71178      284.71 4 650 0.594047566               386.13 0.635518      413.09                   0.00 1,051.12 Assuming IRR is 7.64423 Year Cashflow project Y Discounting factor @ 7.64423% Present Value Discounting factor @12% 0 -1000 1         -1,000.00 1 1 900 0.928986161               836.09 0.892857      803.57 2 100 0.863015288                 86.30 0.797194         79.72 3 55 0.801729259                 44.10 0.71178         39.15 4 45 0.744795387                 33.52 0.635518         28.60                  -0.00      951.04 MIRR of project = (Future Value of cash flow at cost of capital/present value of initial outflow at IRR)^1/2-1 MIRR of Project X = (1051.12/1000)^1/2-1 0.025241435 2.52% MIRR of Project Y = (951.04/1000)^1/2-1 -2.48