Nast Inc. is considering Projects S and L, whose cash flows are shown below. The
ID: 2812504 • Letter: N
Question
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
WACC:
10.75%
0
1
2
3
4
CFS
-$1,100
$375
$375
$375
$375
CFL
-$2,200
$725
$725
$725
$725
WACC:
10.75%
0
1
2
3
4
CFS
-$1,100
$375
$375
$375
$375
CFL
-$2,200
$725
$725
$725
$725
Explanation / Answer
1) NPV: CFS: Year Cash flows PVIF at 10.75% PV at 10.75% 0 -1100 1.00000 -1100 1 375 0.90293 339 2 375 0.81529 306 3 375 0.73615 276 4 375 0.66470 249 NPV = 70 MIRR: Year Cash flows FVIFA at 10.75% FV at 10.75% 1 375 1.35841 509 2 375 1.22656 460 3 375 1.10750 415 4 375 1.00000 375 1760 MIRR = (1760/1100)^(1/4)-1= 12.47% CFL: Year Cash flows PVIF at 10.75% PV at 10.75% 0 -2200 1.00000 -2200 1 725 0.90293 655 2 725 0.81529 591 3 725 0.73615 534 4 725 0.66470 482 NPV = 61 MIRR: Year Cash flows FVIFA at 10.75% FV at 10.75% 1 725 1.35841 985 2 725 1.22656 889 3 725 1.10750 803 4 725 1.00000 725 3402 MIRR = (3402/2200)^(1/4)-1= 11.51% 2) Project CFS will be chosen under both, MIRR and NPV methods, as it has higher MIRR and higher NPV. Hence, value lost is '0'.
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