Question

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 9%.

What is Project A's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

What is Project B's discounted payback? Do not round intermediate calculations. Round your answer to four decimal places.

	0		1		2		3		4
Project A	-1,100		650		400		200		250
Project B	-1,100		250		335		350		700

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 9%.

	0		1		2		3		4
Project A	-1,150		650		370		270		320
Project B	-1,150		250		305		420		770

What is Project A's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

%

What is Project B's MIRR? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Project A			Discount rate=	0.09
Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted CF	Cumulative cash flow	Cumulative discounted CF
0	-1100	-1100	1	-1100	-1100	-1100
1	650	-450	1.09	596.3303	-450	-503.67
2	400	-50	1.1881	336.672	-50	-166.998
3	200	150	1.295029	154.4367	150	-12.561
4	250	400	1.411582	177.1063	400	164.5453
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-12.56))/(164.55-(-12.56))
3.07 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor
Project B			Discount rate=	0.09
Year	Cash flow stream	Cumulative cash flow	Discounting factor	Discounted CF	Cumulative cash flow	Cumulative discounted CF
0	-1100	-1100	1	-1100	-1100	-1100
1	250	-850	1.09	229.3578	-850	-870.642
2	335	-515	1.1881	281.9628	-515	-588.679
3	35000.00%	-165	1.295029	270.2642	-165	-318.415
4	700	535	1.411582	495.8976	535	177.4825
Discounted payback period is the time by which discounted cashflow cover the intial investment outlay
this is happening between year 3 and 4
therefore by interpolation payback period = 3 + (0-(-318.42))/(177.48-(-318.42))
3.64 Years
Where
Discounting factor =(1 + discount rate)^(corresponding year)
Discounted Cashflow=Cash flow stream/discounting factor

Project A
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(841.77)+(439.6)+(294.3)+(320)
=1895.67
Thus year 0 modified cash flow=-1150
=-1150
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1150	650	370	270	320
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	100.00%	1.295029	1.1881	1.09	1
Discounted cash flows	-1150	0	0	0	0
Compounded cash flows	-0.000869565	841.77	439.6	294.3	320
Modified cash flow	-1150	0	0	0	1895.67
Discounting factor (using MIRR)	1	1.133095	1.283904	1.454784	1.6484086
Discounted cash flows	-1150	0	0	0	1150.0001
NPV = Sum of discounted cash flows
NPV=	5.24605E-05
MIRR is the rate at which NPV = 0
MIRR=	13.31%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)
Compounded Cashflow=	Cash flow stream*compounding factor
Project B
Combination approach
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life
Thus year 4 modified cash flow=(323.76)+(362.37)+(457.8)+(770)
=1913.93
Thus year 0 modified cash flow=-1150
=-1150
Discount rate	0.09
Year	0	1	2	3	4
Cash flow stream	-1150	250	305	420	770
Discount factor	1	1.09	1.1881	1.295029	1.4115816
Compound factor	1	1.295029	1.1881	1.09	1
Discounted cash flows	-1150	0	0	0	0
Compounded cash flows	-0.000869565	323.76	362.37	457.8	770
Modified cash flow	-1150	0	0	0	1913.93
Discounting factor (using MIRR)	1	1.135814	1.290072	1.465282	1.6642869
Discounted cash flows	-1150	0	0	0	1150.0001
NPV = Sum of discounted cash flows
NPV=	6.58626E-05
MIRR is the rate at which NPV = 0
MIRR=	13.58%
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Compounding factor =	(1 + reinvestment rate)^(time of last CF-Corresponding period in years)