MIRR and NPV Your company is considering two mutually exclusive projects, X and

Question

MIRR and NPV

Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:

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 %=____________

Which project has the higher MIRR?

Year X Y 0 -$5,000 -$5,000 1 1000 4,500 2 1500 1500 3 2000 1000 4 4000 500

Explanation / Answer

Introduction:

MIRR as a measure to evaluation of project has been proved to give more realistic view on returns compared to IRR. Being a step forward to IRR, MIRR should ideally be calculated after having a positive NPV, IRR can also be calculated as it gives an indication about the MIRR as the MIRR lies around IRR.

Solution:

Final Answer:

Thus, MIRR for Project X is 7.98% and for Project Y is 13.63%

Year X PV of Project X Y PV of Project Y 0 $5,000.00 ($5,000.00) $5,000.00 ($5,000.00) 1 $1,000.00 $884.96 $4,500.00 $3,982.30 2 $1,500.00 $1,174.72 $1,500.00 $1,174.72 3 $2,000.00 $1,386.10 $1,000.00 $693.05 4 $4,000.00 $2,453.27 $500.00 $306.66 Total PV $5,899.05 $6,156.73 NPV $899.05 $1,156.73 IRR 5.91% 14.72% Cost of Capital 13.00% 13.00% MIRR 7.98% 13.63%

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