A firm is considering two mutually exclusive projects, X and Y, with the followi
ID: 2764658 • Letter: A
Question
A firm is considering two mutually exclusive projects, X and Y, with the following cash flow:
Project X: Project Y:
Year CF Year CF
0 -$1,000 0 -$1000
1 $90 1 $1,100
2 $320 2 $110
3 $370 3 $45
4 $650 4 $45
The project are equally risky, and their WACC is 8%. What is the MIRR of the project that maximizes shareholder value?
Explanation / Answer
Project X Project Y year PV Factor @ 8% Cash Flow PV of Cash flows Cash Flow PV of Cash flows Year 0 1.000 (1,000) (1,000.00) (1,000) (1,000.00) Year 1 0.926 90 83.33 1,100 1,018.52 Year 2 0.857 320 274.35 110 94.31 Year 3 0.794 370 293.72 45 35.72 Year 4 0.735 650 477.77 45 33.08 NPV $ 129.17 $ 181.62 As the NPV of Project Y is more , it maximizes shareholders wealth MIRR Of Y Cash Inflows Compounding rate @8% Terminal Value of Cash inflow year Year 0 Year 1 1,100 1.2597 1,386 Year 2 110 1.1664 128 Year 3 45 1.0800 49 Year 4 45 1.0000 45 1,607.59 PV Of investment = 1,000 Terminal Value of Cash Inflows = 1,608 MIRR = Nth root ( Terminal Value/PV of investment)-1 MIRR =4th Root (1607.59/1000)-1 MIRR =12.60%
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