Quantitative Problem: Bellinger Industries is considering two projects for inclu
ID: 2719270 • Letter: Q
Question
Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. Both projects have 4-year lives, and they have risk characteristics similar to the firm's average project. Bellinger's WACC is 10%.
What is Project A's MIRR? Round your answer to two decimal places. Do not round your intermediate calculations.
0 1 2 3 4 Project A -1,450 700 355 220 270 Project B -1,450 300 290 370 720Explanation / Answer
Step 1: Calculate the Terminal value of Inflows: @ the Rat of 10%
Project A
Year
Cashflow
Duration( in Years)
Workings @ 10%
Terminal Value
1
700
3
700 x (1.1)^3
931.7
2
355
2
355 x (1.1)^2
429.55
3
220
1
220 x (1.1)
242
4
270
0
270
270
Terminal Value
1873.25
Step 2: Calculate the Present value of Outflows:
Cashflow
Duration( in Years)
Workings
Terminal Value
1450
0
0
1450
Step 3: Calculate MIRR
=4 -1= 6.61%
Project B
Year
Cashflow
Duration( in Years)
Workings @ 10%
Terminal Value
1
300
3
300 x (1.1)^3
399.3
2
290
2
290 x (1.1)^2
350.9
3
370
1
370 x (1.1)
407
4
720
0
720
720
Terminal Value
1877.2
Step 2: Calculate the Present value of Outflows:
Cashflow
Duration( in Years)
Workings
Terminal Value
1450
0
0
1450
Step 3: Calculate MIRR
=4 -1= 6.67%
Answer Project A MIRR is: 6.61%
Project A
Year
Cashflow
Duration( in Years)
Workings @ 10%
Terminal Value
1
700
3
700 x (1.1)^3
931.7
2
355
2
355 x (1.1)^2
429.55
3
220
1
220 x (1.1)
242
4
270
0
270
270
Terminal Value
1873.25