Your company is considering two mutually exclusive projects

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. Round your answers to two decimal places.

Project X

Project Y

Solution

MIRR Project X 17.77% Project Y 19.03% Based on MIRR, Project Y is more attractive as it gives more return than project X.So,Y is preferreable. Working: MIRR = ((Future Value of positive cash flows/Present Value of negative cash flows)^(1/life in years))-1 Project X: Future value of positive cash flows: Year Cash flow Future Value of 1 Future Value of Cash flows a b c=1.13^(4-a) d=b*c 1 1000         1.443     1,442.90 2 1500         1.277     1,915.35 3 2000         1.130     2,260.00 4 4000         1.000     4,000.00 Total     9,618.25 MIRR = ((9618.25/5000)^(1/4))-1 = 17.77% Project Y: Future value of positive cash flows: Year Cash flow Future Value of 1 Future Value of Cash flows a b c=1.13^(4-a) d=b*c 1 4500         1.443     6,493.04 2 1500         1.277     1,915.35 3 1000         1.130     1,130.00 4 500         1.000        500.00 Total 10,038.39 MIRR = ((10038.39/5000)^(1/4))-1 = 19.03%