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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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**MIRR Unequal Lives** Grady Enterprises is considering two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. - **Restaurant Project:** - Initial cost: $1,500,000 - Cash flows: - Year 1: $190,000 - Year 2: $210,000 - Years 3-5: $270,000 annually - Year 6: $1,740,000 (including sale of the restaurant) - **Sports Facility Project:** - Initial cost: $2,470,000 - Cash flows: - Years 1-3: $400,000 annually - Year 4: $3,460,000 (including sale of the facility) The appropriate discount rates are 9.5% for the restaurant and 13.0% for the sports facility. **Questions:** 1. What are the MIRRs for the Grady Enterprises projects? 2. What are the MIRRs when adjusting for the unequal project lives? 3. Does the MIRR adjusted for unequal lives change the decision based on the MIRRs? *Hint:* Take all cash flows to the same ending period as the longest project.
Transcribed Image Text:**MIRR Unequal Lives** Grady Enterprises is considering two project opportunities for a parcel of land the company currently owns. The first project is a restaurant, and the second project is a sports facility. - **Restaurant Project:** - Initial cost: $1,500,000 - Cash flows: - Year 1: $190,000 - Year 2: $210,000 - Years 3-5: $270,000 annually - Year 6: $1,740,000 (including sale of the restaurant) - **Sports Facility Project:** - Initial cost: $2,470,000 - Cash flows: - Years 1-3: $400,000 annually - Year 4: $3,460,000 (including sale of the facility) The appropriate discount rates are 9.5% for the restaurant and 13.0% for the sports facility. **Questions:** 1. What are the MIRRs for the Grady Enterprises projects? 2. What are the MIRRs when adjusting for the unequal project lives? 3. Does the MIRR adjusted for unequal lives change the decision based on the MIRRs? *Hint:* Take all cash flows to the same ending period as the longest project.
Expert Solution
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MIRR or modified internal rate of return can be defined as the advanced part of IRR. The assumption made under this method is that the cash flows are reinvested at the cost of capital.

MIRR = (sum of /sum of PV)^1/n - 1

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