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MIRR unequal lives. Singing Fish Fine Foods has $1,910,000 for capital investments this year and is...

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MIRR unequal lives. Singing Fish Fine Foods has$1,910,000 for capital investments this year and is considering twopotential projects for the funds. Project 1 is updating the?store's deli section for additional food service. Theestimated?after-tax cash flow of this project is ?$590,000 per yearfor the next five years. Project 2 is updating the? store's winesection. The estimated annual? after-tax cash flow for this projectis ?$520,000 for the next six years. The appropriate discount ratefor the deli expansion is 9.3?% and the appropriate discount ratefor the wine section is 8.8?%. What are the MIRRs for the SingingFish Fine Foods? projects? What are the MIRRs when you adjust forunequal?lives? Do the MIRR adjusted for unequal lives change thedecision based on? MIRRs? ?Hint: Take all cash flows to the sameending period as the longest project.

If the appropriate reinvestment rate for the deli expansion is9.3?%, what is the MIRR of the deli? expansion? _________?% ?(Roundto two decimal? places.)

If the appropriate reinvestment rate for the wine section is8.8%, what is the MIRR of the wine? section? ________% ?(Round totwo decimal? places.)

Based on the? MIRR, Singing Fish Fine Foods should pick the(Wine or Deli) project. (Select One.)

What is the MIRR adjusted for unequal lives of the deli?expansion? ________?% ?(Round to two decimal? places.)

What is the MIRR adjusted for unequal lives of the wine?section?________?%? (Round to two decimal? places.)

Based on the adjusted? MIRR, Singing Fish Fine Foods should pickthe (Wine or Deli) section project. ?(Select One.)

Does the decision? change? (Yes or No).  (SelectOne)

Answer & Explanation Solved by verified expert
3.8 Ratings (656 Votes)

PROJECT 1 DELI SECTION
Future value of Cash Flow after N Year
(Cash Flow)*((1+i)^(N-t))
i=discount Rate=9.3%=0.093
N=5
t Year 1 2 3 4 5
CF Cash Flow $590,000 $590,000 $590,000 $590,000 $590,000 SUM
FV=CF*(1.093^(5-t)) Future value of Cash Flow after 5 Year $842,040 $770,393 $704,843 $644,870 $590,000 $3,552,146
1910000*(1+MIRR)^5= $3,552,146
(1+MIRR)^5=                1.86 (3552146/1910000)
1+MIRR=1.86^(1/5)= 1.13211747
MIRR=1.13211747-1= 0.13211747
MIRR= 13.21%
PROJECT 2 WINE SECTION
Future value of Cash Flow after N Year
(Cash Flow)*((1+i)^(N-t))
i=discount Rate=8.8%=0.088
N=6
t Year 1 2 3 4 5 6
CF Cash Flow $520,000 $520,000 $520,000 $520,000 $520,000 $520,000 SUM
FV=CF*(1.088^(6-t)) Future value of Cash Flow after 6Year $792,771 $728,650 $669,715 $615,547 $565,760 $520,000 $3,892,443
1910000*(1+MIRR)^6= $3,892,443
(1+MIRR)^6=                2.04 (3892443/1910000)
1+MIRR=2.04^(1/6)= 1.12598209
MIRR=1.12598209-1= 0.12598209
MIRR= 12.60%
BASED ON MIRR PROJECT 1(DELI SECTION )SHOULD BE SELECTED
ADJUSTED MIRR
Adjust the shorter project to longer life
ADJUST PROJECT 1 to6 years Life
t Year 1 2 3 4 5 6
CF Cash Flow $590,000 $590,000 $590,000 $590,000 $590,000 $0 SUM
FV=CF*(1.093^(6-t)) Future value of Cash Flow after 6Year $920,350 $842,040 $770,393 $704,843 $644,870 $0 $3,882,496
1910000*(1+MIRR)^6= $3,882,496
(1+MIRR)^6=                2.03 (3882496/1910000)
1+MIRR=2.03^(1/6)= 1.12550199
MIRR=1.12550199-1= 0.12550199
MIRR= 12.55%
ADJUSTED MIRR CHANGES DECISION
BASED ON ADJUSTED MIRR, PROJECT 2(WINE SECTION )SHOULD BE SELECTED

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Transcribed Image Text

MIRR unequal lives. Singing Fish Fine Foods has$1,910,000 for capital investments this year and is considering twopotential projects for the funds. Project 1 is updating the?store's deli section for additional food service. Theestimated?after-tax cash flow of this project is ?$590,000 per yearfor the next five years. Project 2 is updating the? store's winesection. The estimated annual? after-tax cash flow for this projectis ?$520,000 for the next six years. The appropriate discount ratefor the deli expansion is 9.3?% and the appropriate discount ratefor the wine section is 8.8?%. What are the MIRRs for the SingingFish Fine Foods? projects? What are the MIRRs when you adjust forunequal?lives? Do the MIRR adjusted for unequal lives change thedecision based on? MIRRs? ?Hint: Take all cash flows to the sameending period as the longest project.If the appropriate reinvestment rate for the deli expansion is9.3?%, what is the MIRR of the deli? expansion? _________?% ?(Roundto two decimal? places.)If the appropriate reinvestment rate for the wine section is8.8%, what is the MIRR of the wine? section? ________% ?(Round totwo decimal? places.)Based on the? MIRR, Singing Fish Fine Foods should pick the(Wine or Deli) project. (Select One.)What is the MIRR adjusted for unequal lives of the deli?expansion? ________?% ?(Round to two decimal? places.)What is the MIRR adjusted for unequal lives of the wine?section?________?%? (Round to two decimal? places.)Based on the adjusted? MIRR, Singing Fish Fine Foods should pickthe (Wine or Deli) section project. ?(Select One.)Does the decision? change? (Yes or No).  (SelectOne)

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