MIRR and Unequal Lives

Practice Problems

1) Project M and N have the following projected after-tax cash flows. The companys WACC is 9%.

M N

Cost ($2,000,000) ($2,200,000)

Year 1 500,000 600,000

Year 2 500,000 600,000

Year 3 500,000 600,000

Year 4 500,000 600,000

Year 5 500,000 600,000

a) What is the MIRR of each project? (Note: since the cash inflows are the same in each year, you can use the PMT button to input the flows to create the terminal value for Step 1 of the MIRR calculation.)

b) If the projects are mutually exclusive, what decision should the company make?

c) If the projects are independent, what decision should the company make?

2) A company is considering two project opportunities for a piece of land the company currently owns. One is to open a restaurant and the other is to open a gym. The projects are mutually exclusive. Their after-tax projected cash flows are outlined below. If the company opens a restaurant, it would plan on selling the restaurant after 3 years. If the company opens a gym, it would plan on selling the gym after 6 years. The company has a 12% weighted average cost of capital. What decision should the company make? (Use both replacement chain and equivalent annual annuity approaches to determine the appropriate decision.)

Restaurant Gym

Cost ($1,500,000) ($2,400,000)

Year 1 500,000 400,000

Year 2 750,000 600,000

Year 3 2,000,000 900,000

Year 4 1,000,000

Year 5 1,000,000

Year 6 2,500,000