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. Do not round your intermediate calculations. _____%

Solution

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

X:

Present value of inflows=90/1.12+320/1.12^2+400/1.12^3+700/1.12^4

=$1065.03

NPV=Present value of inflows-Present value of outflows

=$1065.03-$1000

=$65.03(Approx).

Y:

Present value of inflows=1100/1.12+90/1.12^2+45/1.12^3+45/1.12^4

=$1114.52

NPV=Present value of inflows-Present value of outflows

=$1114.52-$1000

=$114.52(Approx)

Hence Y maximizes shareholders value having higher NPV.

Hence Y:

We use the formula:

A=P(1+r/100)^n

where

A=future value

P=present value

r=rate of interest

n=time period.

A=1100(1.12)^3+90(1.12)^2+45*(1.12)+$45

=$1753.7168

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

=[1753.7168/1000]^(1/4)-1

which is equal to

=15.08%(Approx).