Bellinger Industries is considering two projects for inclusion in its capital bu

Question

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 7%.

0 1 2 3 4

Project A -1,200 700 370 230 280

Project B -1,200 300 305 380 730

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

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

Explanation / Answer

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:

Future value of inflows=700*(1.07)^3+370*(1.07)^2+230*(1.07)+280

=$1807.2431

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

=[$1807.2431/1200]^(1/4)-1

=10.78%(Approx).

B:

Future value of inflows=300*(1.07)^3+305*(1.07)^2+380*(1.07)+730

=$1853.3074

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

=[$1853.3074/1200]^(1/4)-1

=11.48%(Approx).

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