Nast Inc. is considering Projects S and L, whose cash flows are shown below. The

Question

Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.

WACC: 8%

Year

0

1

2

3

4

CFS

-$1,100

$380

$380

$380

$380

CFL

-$2,200

$730

$730

$730

$730

$39.45

$42.83

$48.56

$53.70

$59.24

Year

0

1

2

3

4

CFS

-$1,100

$380

$380

$380

$380

CFL

-$2,200

$730

$730

$730

$730

Explanation / Answer

Alternative - 1 ar CFS CFL 0 1.00 ($1,100) ($1,100) ($2,200) ($2,200) 1 0.93 $380 $352 $730 $676 2 0.86 $380 $326 $730 $626 3 0.79 $380 $302 $730 $579 4 0.74 $380 $279 $730 $537 14.32% $159 12.37% $218 $59.24 IRR IRR Alternative - 2 differential NPV 0 1.00 ($1,100) -1100.0 1 0.93 $350 324.1 2 0.86 $350 300.1 3 0.79 $350 277.8 4 0.74 $350 257.3 59.244 ANSWER IS 59.24

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