Mooradian Corporation estimates that its cost of capital is 11 percent. The company is considering two mutually exclusive projects whose after-tax cash flows are as follows:
Year Project SProject L -
0-$3,000 -$9,000
12,500-1,000
21,500 5,000
31,500 5,000
4-500 5,000
What is the modified internal rate of return (MIRR) of the project with the highest NPV?
Click on the arrows to vote for the correct answer
A. B. C. D. E.Explanation
Use cash flow registers to determine the NPV of each project:
NPV(S) = $1,237.11; NPV(L) = $1,106.82.
Since NPV(S) > NPV(L) we need to calculate MIRR(S).
Calculate the PV of cash outflows:
CF(0) = -3,000; CF(1-3) = 0; CF(4) = -500; I = 11. Solve for NPV = $3,329.37.
Calculate the TV of cash inflows:
First find the cumulative PV, then take forward as a lump sum to find the TV.
Solve for NPV = $4,566.47.
Calculate TV or FV: N = 4; I = 11; PV = -4,566.47; PMT = 0.
Solve for FV = $6,932.22.
Calculate MIRR: N = 4; PV = -3,329.37; PMT = 0; FV = 6,932.22.
Solve for MIRR = I = 20.12%.