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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Question
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Transcribed Image Text:MIRR unequal lives. Grady Enterprises is looking at 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. The projected cash flow of the restaurant is an initial cost of $1,500,000 with cash flows over the next six years of $190,000 (year
one), $210,000 (year two), $270,000 (years three through five), and $1,740,000 (year six), at which point Grady plans to sell the restaurant. The sports facility has the
following cash flows: an initial cost
point Grady plans to sell the facility. The appropriate discount rate for the restaurant is 9.5% and the appropriate discount rate for the sports facility is 13.0%. What are
the MIRRS for the Grady Enterprises projects? What are the MIRRS when you adjust for the unequal lives? Do 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.
$2,470,000 with cash flows over the next four years of $400,000 (years
through three) and $3,460,000 (year four), at which
Expert Solution
Step 1
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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