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

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

Step-by-step 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).