Question

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 $100 $320 $400 $700 Project Y -$1,000 $1,000 $110 $55 $45 The projects are equally risky, and their WACC is 13%. What is the MIRR of the project that maximizes shareholder value

Answer 1

Answer:

Project X maximizes shareholder value (highest NPV) and has a MIRR of 14.27%.

Explanation:

year       cash flow project X          cash flow project Y

0                   -1,000                             -1,000

1                        100                               1,000

2                      320                                   110

3                      400                                   55

4                      700                                   45

WACC = 13%

Using an excel spreadsheet I calculated the projects' NPV, IRR and MIRR

                                                        NPV         IRR     MIRR

project X                                        $45.65      15%    14.27%

project Y                                        $36.82      16%    14.03%  

The modified internal rate of return (MIRR) considers that the project's cash inflows are invested at the company's WACC and the initial investment is financed at a certain debt rate (in this case the same WACC).