“Bankrupt” Corporation is in a deep financial crisis. You are one of the financial avengers “Bankrupt” is desperately seeking help from. CEO of the company informed you that he is considering the two risky projects “Thanos” and “Loki” to protect the firm from financial collapse. Both projects have similar risk characteristics. Bankrupt’s WACC is 11%. The initial investments for both the projects are $200 million. Cashflow from the projects are as follows;

Year           1                2                3                4

Thanos       10M           60M           80M           160M

Loki           70M           50M           20M           160M

Now, your job is to explain the following questions in great detail so that the CEO understands your plans to protect the firm.

1. WACC has increased to 15%. What change you will see in IRR? Is it good for the firm?
2. What is the reinvestment assumption for NPV and IRR? Why NPV is better than IRR?
3. Find the MIRR for both projects and explain the difference with IRR.
4. Is MIRR a better measure than NPV? Why and why not?

Answer rating: 100% (QA)

1 Effect of WACC Increase on IRR With an increase in WACC from 11 to 15 the IRR for both projects is ... View the full answer