Big Company is evaluating two projects, Project A and Project B. Both projects a

Question

Big Company is evaluating two projects, Project A and Project B. Both projects are of equal risk. Big Company has a WACC of 10%. The expected free cash flows of the projects are as follows

A. Compute the Modified Internal Rate of Return (MIRR) for Project “A”.

B. The modified internal rate of return of project “B” is 20.96%. If projects “A” and “B” are independent, considering only the MIRR method, which project(s) should Big Company proceed with? Explain your answer.

C. The modified internal rate of return of project “B” is 20.96%. If project(s) “A” and “B” are mutually exclusive, considering only the MIRR method, which project(s) should Big Company proceed with? Explain your answer.

Period Annual Cash Flows Project A Annual Cash Flows Project B 0 (25,000) (25,000) 1 5,000 20,000 2 10,000 10,000 3 15,000 8,000 4 20,000 6,000

Explanation / Answer

MIRR for Project A=((5000*1.1^3+10000*1.1^2+15000*1.1^1+20000)/(25000))^(1/4)-1=21.93%

MIRR for Project B=20.96%

If exclusive, Project A should be selected as A has higher MIRR

If independent, both Projects A & B should be selected as both have MIRR greater than WACC

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