FM11 14 - However, if the cost of capital is less than the...

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d. Here is the MIRR for Project A when r = 10%: PV costs = $300 + $387/(1.10) 1 + $193/(1.10) 2 + $100/(1.10) 3 + $180/(1.10) 7 = $978.82. TV inflows = $600(1.10) 3 + $600(1.10) 2 + $850(1.10) 1 = $2,459.60. Now, MIRR is that discount rate which forces the TV of $2,459.60 in 7 years to equal $978.82: $952.00 = $2,547.60(1+MIRR) 7 . M I R R A = 14.07%. Similarly, MIRR B = 15.89%. At r = 17%, MIRR A = 17.57%. MIRR B = 19.91%. e. To find the crossover rate, construct a Project which is the difference in the two projects' cash flows: Project = Year CF A - CF B 0 $105 1 (521) 2 (327) 3 (234) 4 466 5 466 6 716 7 (180) IRR = Crossover rate = 14.53%.
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Unformatted text preview: However, if the cost of capital is less than the crossover rate the two methods lead to different project selections--a conflict exists. When a conflict exists the NPV method must be used. Because of the sign changes and the size of the cash flows, Project has multiple IRRs. Thus, a calculator's IRR function will not work. One could use the trial and error method of entering different discount rates until NPV = $0. However, an HP can be "tricked" into giving the roots. After you have keyed Project Delta's cash flows into the g register of an HP-10B, you will see an "Error-Soln" message. Now enter 10 & STO & IRR/YR and the 14.53% IRR is found. Then enter 100 & STO & IRR/YR to obtain IRR = 456.22%. Similarly, Excel or Lotus 1-2-3 can also be used. Answers and Solutions: 11 - 14...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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