Question

MIRR unequal lives. Singing Fish Fine Foods has $1,800,000 for capital investments this year and is considering two potential projects for the funds. Project 1 is updating the store's deli section for additional food service. The estimated after-tax cash flow of this project is S650,000 per year for the next five years. Project 2 is updating the store's wine section. The estimated annual after-tax cash flow for this project is $510,000 for the next six years. The appropriate discount rate for the deli expansion is 9.6% and the appropriate discount rate for the wine section is 8.9%. What are the MIRRs for the Singing Fish Fine Foods projects? What are the MIRRs when you adjust for unequal lives? Do the MIRR adjusted for unequal lives change the decision based on MIRRs? Hint Take all cash flows to the same ending period as the longest project.

Answer 1

1: MIRR Project 1 = 16.94%

Project 2 = 13.4%

Without adjustment
Year	Project 1 CF	Project 2 CF
0	-1800000	-1800000
1	650000	510000
2	650000	510000
3	650000	510000
4	650000	510000
5	650000	510000
6		510000
MIRR	16.94%	13.40%

Project 1 will be selected since it has higher MIRR

2:

	Project 1	Project 2
MIRR	11.07%	9.93%

With adjustment
Year	Project 1 CF	Project 2 CF
0	-1800000	-1800000
1	650000	510000
2	650000	510000
3	650000	510000
4	650000	510000
5	-1150000	510000
6	650000	-1290000
7	650000	510000
8	650000	510000
9	650000	510000
10	-1150000	510000
11	650000	510000
12	650000	-1290000
13	650000	510000
14	650000	510000
15	-1150000	510000
16	650000	510000
17	650000	510000
18	650000	-1290000
19	650000	510000
20	-1150000	510000
21	650000	510000
22	650000	510000
23	650000	510000
24	650000	-1290000
25	-1150000	510000
26	650000	510000
27	650000	510000
28	650000	510000
29	650000	510000
30	650000	510000

Still Project 1 is selected since it has higher MIRR. The decision is the same.

WORKINGS

Book1- Excel X AutoSave ( Off Sign in Tell me what you want to do File Formulas Review View Help Share Home Insert Draw Page Layout Data 9 Calibri bWrap Text General A A Conditional Format as Cell Formatting BIUH Insert Delete Format Sort & Find & Paste A Merge & Center $% Table Styles Filter Select Clipboard Alignment Number Styles Cell Editing Font A1 Without A B C F G k Without With Proiect 1 Project 2 adjustment adjustment MIRR MIRR(F3:F33,9.6 % ,9.6 % ) -MIRR ( G3 : G33,8.9% ,8.9 % ) 1 CF Project 2 C Project 2 CF ear Project 1 CF Year 2 4 1 510000 650000 510000 650000 5 2 650000 510000 650000 510000 6 3 650000 510000 510000 650000 7 4 650000 510000 1 650000 510000 8 5 650000 510000 650000 1800000 510000 S10000-1800000 96 510000 6 650000 10 7 650000 510000 -MIRR (B3: B8 ,9.6 % , 9.6 % ) 11 MIRR MIRR(C3:C9,8.9 % , 8.9% ) 650000 510000 12 650000 510000 13 10 -650000-1800000 510000 14 11 650000 510000 15 12 650000 510000-1800000 16 13 650000 510000 17 14 650000 510000 18 15 -650000-1800000 510000 19 510000 16 650000 Sheet5 Sheet6 Sheet2 Sheet3 Sheet1 Sheet4 + Ready

Book1- Excel X Sign in AutoSave Off Tell me what you want to do File Formulas Review View Help Share Home Insert Draw Page Layout Data 9 Wrap Text General A A Calibri Conditional Format as Cell Formatting BIUH Insert Delete Format Sort & Find & Paste A Merge & Center $% Filter Select Table Styles Clipboard Alignment Number Styles Cell Editing Font Without A1 A B C F K 14 1 650000 510000 650000 15 12 510000-1800000 16 13 650000 510000 17 14 650000 510000 18 15 -650000 1800000 51000 19 16 650000 510000 20 17 650000 510000 21 18 510000-1800000 650000 22 19 650000 510000 23 20 650000-1800000 510000 24 21 650000 510000 22 650000 510000 0OIS CLVIKX 27 -1800000 28 -6500U0-1800000 510000 29 26 650000 510000 30 27 510000 650000 31 28 650000 510000 32 29 650000 510000 33 3C 650000 510000 24 Sheet5 Sheet6 Sheet2 Sheet3 Sheet1 Sheet4 + Ready x