A firm is considering two mutually exclusive projects, X and Y,with the followin

Question

A firm is considering two mutually exclusive projects, X and Y,with the following cash flows:

                                   0      1                    2      3          4                     

                                  |_________|_____________|_____________|_____________|

Project X          -$1000     $100                  $300     $400      $700               

Project Y          -$1000         $1,000      $100        $50           $50     

The projects are equally risky, and their WACC is 12 percent.What is the MIRR of the better project?

     

Explanation / Answer

There are 3 steps involved in MIRRCalculation:

Step:1           Calculate the Present Value of all Negative Cash Flows (using theCost of Capital as the Interest rate).

Year

Cash flows

FV Factor at 12%

Future Values

Year

Cash flows

FV Factor at 12%

Future Values

Calculating MIRRfor Project "X"

Year

Cash flows

FV Factor at 12%

Future Values

1 $100 1.4049 $140.49 2 $300 1.2544 $376.32 3 $400 1.1200 448.00 4 $700 1 $700.00 Future Values $1,664.81 PV = FV/(1+MIRR)4 $1,000 = $1,664.81/ (1+MIRR)4 (1+MIRR)4 = $1,664.81 /$1,000 MIRR = 13.59% Calculating MIRR for Project"Y"

Year

Cash flows

FV Factor at 12%

Future Values

1 $1,000 1.4049 $1,404.90 2 $100 1.2544 $125.44 3 $50 1.1200 $56.00 4 $50 1 $56.00 Future Values $1,642.34 PV = FV/ (1+MIRR)4 $1,000 = $1,642.34/ (1+MIRR)4 (1+MIRR)4 = $1,642.34 /$1,000 MIRR = 13.20% Project "X"  MIRR    13.59% Proect "Y" MIRR    13.20%

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