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Managerial Finance- NPV versus MIRR

Nast Incorporated is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone, if any?

Cash Flows (CF):
0 1 2 3 4
CF Project S -$1,100 $375 $375 $375 $375
CF Project L -$2,200 $725 $725 $725 $725

WACC: 9.00%

Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

If we use the MIRR Method, the following results are obtained:

Project S Project L

Year CFS FV at 9% Year CFL FV at 9%
1 375 485.64 1 725 938.90
2 375 445.54 2 725 861.37
3 375 408.75 3 725 790.25
4 375 375.00 4 725 ...

Solution Summary

Solution describes the steps to estimate NPV and MIRR for each of the given cases. It also determines the decrease in firm's value if decision is made based upon MIRR method.

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