Silverman Co.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? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost. $\begin{array}{lccccc}
\text { WACC: } & 8.75 \% & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725
\end{array}$
A) $32.12
B) $35.33
C) $38.87
D) $40.15
E) $42.16

Question

Quizplus · Accepted Answer

$\begin{array}{lccccccc}
\text { WACC: } & 8.750 \% & & & & & & \
\text { Year } & 0 & 1 & 2 & 3 & 4 & \text { TV } & \text { MIRR } \
\mathrm{CF}_{\mathrm{S}} & -\$ 1,100 & \$ 375 & \$ 375 & \$ 375 & \$ 375 & & \
& & 482.30 & 443.50 & 407.81 & 375.00 & \$ 1,708.61 & 11.64 \% \
\mathrm{CF}_{\mathrm{L}} & -\$ 2,200 & \$ 725 & \$ 725 & \$ 725 & \$ 725 & & \
& & 932.45 & 857.43 & 788.44 & 725.00 & \$ 3,303.31 & 10.70 \% \
\Delta & \$ 1.100  & \$ 350 & \$ 350 & \$ 350 & \$ 350
\end{array}$ 
Crossover rate = 10.396%
 $$\begin{array} { l l } 
\text { MIRR } _ { L } & 10.70 \% \
\text { MIRR } _ { 5 } & 11.64 \% \
\mathrm { NPV } _ { \mathrm { L } } & \$ 161.74\
\mathrm { NPV_{5 } } 
& \$ \frac { 121.59 } { 40.15 } = V _ { \text {alue lost if use the MIRR criterion } }
\end{array}$$ Note that the WACC is not constrained to be less than the crossover rate.So,there may not be a conflict between NPV and IRR; hence,following the MIRR rule may not result in a loss of value.In that case,the correct answer is $0.00.

Silverman Co A) $3212 B) $35

Silverman Co A) $3212
B) $35