MIRR A firm is considering two mutually exclusive projects, X and Y, with the fo
ID: 2795623 • Letter: M
Question
MIRR
A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:
The projects are equally risky, and their WACC is 12%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.
Problem Walk-Through
MIRR
A firm is considering two mutually exclusive projects, X and Y, with the following cash flows:
0 1 2 3 4 Project X -$1,000 $90 $280 $400 $700 Project Y -$1,000 $1,000 $110 $50 $45The projects are equally risky, and their WACC is 12%. What is the MIRR of the project that maximizes shareholder value? Round your answer to two decimal places. Do not round your intermediate calculations.
Explanation / Answer
Project X
Future value of positive cash flows
MIRR for Project X = {[1625.676 / 1000] ^(1/4)} - 1Present value of negative cash flows = -1000 (as there are no ther negative cash flows)
= 1.129168 -1
= 12.92%
MIRR = {[Future value of positive cash flows at reinvestment rate / (- Present value of negative cash flows at finance rate)] ^(1/n)} - 1
Project Y
Future value of positive cash flows
Present value of negative cash flows = -1000 (as there are no ther negative cash flows)
MIRR for Project X = {[1643.912 / 1000] ^(1/4)} - 1Present value of negative cash flows = -1000 (as there are no ther negative cash flows)
= 1.132321 -1
= 13.23%
Year Cash flow FV = (1+r)^n FV A B A x B 1 90 (1+0.12)^3 1.404928 126.4435 2 280 (1+0.12)^2 1.2544 351.232 3 400 (1+0.12)^1 1.12 448 4 700 (1+0.12)^0 1 700 1625.676Related Questions
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