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
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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 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.
A Memo to the CFO and CEO
Provide a final full report of 4-6 pages to the CFO and CEO that encompasses the following:
- Financial pros and cons and final recommendations for Superior going public and the new production plant
- Discussion on what hurdle rates the production plant project would not pass
- Debt versus no debt option (associated risk and impact to financial statements)
- Key financial metrics for the senior management team
Make sure your metrics include the following:
- Payback period
- Net present value
- Internal rate of return
- Modified internal rate of return