Yr Sates of Affairs Cash Flow Mcarthys Cash Flow Gotham Cash Flow 0 -$7,500,000
ID: 2717554 • Letter: Y
Question
Yr
Sates of Affairs
Cash Flow
Mcarthys
Cash Flow
Gotham
Cash Flow
0
-$7,500,000
-$5,000,000
-$4,000,000
1
$5,000,000
$1,000,000
$5,750,000
2
$4,500,000
$2,000,000
$5,750,000
3
$3,000,000
$3,000,000
-$1,000,000
4
-$1,000,000
$4,000,000
$0.00
5
$2,500,000
$4,000,000
6
$2,500,000
Required rate of return: 8.00%
Calculate the Modified Internal Rate of Return for each project. Which projects should be accepted?
If the company only has$10,000,000 for projects which project(s) should be accepted using the equivalent Annual Annuity? Report the EEA for each project?
Yr
Sates of Affairs
Cash Flow
Mcarthys
Cash Flow
Gotham
Cash Flow
0
-$7,500,000
-$5,000,000
-$4,000,000
1
$5,000,000
$1,000,000
$5,750,000
2
$4,500,000
$2,000,000
$5,750,000
3
$3,000,000
$3,000,000
-$1,000,000
4
-$1,000,000
$4,000,000
$0.00
5
$2,500,000
$4,000,000
6
$2,500,000
Explanation / Answer
Enter the cash flows in an excel sheet for 3 projects and calculate MIRR as follows
Sates of Affairs: MIRR = MIRR(A1:A7,8%,8%) = 18.19%
Mcarthys: MIRR = MIRR(B1:B6,8%,8%) = 25.71%
Gotham: MIRR = MIRR(C1:C5,8%,8%) = 30.61%
According to MIRR method, the company should accept Gotham, since the MIRR with Gotham cash flows is higher
2) First calculate NPV's of each project as follows
Sates of Affairs: NPV = NPV(8%,A2:A7)-7.5 = 5.91
Mcarthys: NPV = NPV(8%,B2:B6)-5 = 5.68
Gotham: NPV = NPV(8%,C2:C5)-4 = 5.46
Now calculate EAA as follows
Sates of Affairs: EAA = PMT(8%,7,-5.91,0,0)=$1.14
Mcarthys: EAA = PMT(8%,6,-5.68,0,0)=$1.23
Gotham: EAA = PMT(8%,5,-5.46,0,0)=$1.37
So since EAA of Gotham cash flows is higher, the company should go for Gotham cash flows.
If company has $ 10 million, it should go for both Mcarthys and Gotham projects.
Note: All numbers above are in million dollars
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