Grady Enterprises is looking a

Grady Enterprises is looking at two project opportunities for aparcel of land the company currently owns. The first project is a​restaurant, and the second project is a sports facility. Theprojected cash flow of the restaurant is an initial cost of ​$1comma 410 comma 000 with cash flows over the next six years of​$230 comma 000 ​(year one), ​$270 comma 000 ​(year two), $ 290comma 000 ​(years three through​ five), and ​$1 comma 730 comma 000​(year six), at which point Grady plans to sell the restaurant. Thesports facility has the following cash​ flows: an initial cost of​$2 comma 350 comma 000 with cash flows over the next four years of​$430 comma 000 ​(years one through​ three) and ​$2 comma 760 comma000 ​(year four), at which point Grady plans to sell the facility.The appropriate discount rate for the restaurant is 9.0​% and theappropriate discount rate for the sports facility is 13.0​%. Whatare the MIRRs for the Grady Enterprises​ projects? What are theMIRRs when you adjust for the unequal​ lives? Do the MIRR adjustedfor unequal lives change the decision based on the​ MIRRs? ​Hint:Take all cash flows to the same ending period as the longestproject.

If the appropriate reinvestment rate for the restaurant is9.0​%, what is the MIRR of the restaurant​ project?

2.If the appropriate reinvestment rate for the sports facilityis 11.5​%, what is the MIRR of the sports​ facility?

3. What is the MIRR of the restaurant when you adjust forunequal​ lives?

4. What is the MIRR of the sports facility when you adjust forunequal​ lives?

Answer:

EXCEL funtion :- =MIRR(Cash Flow values, Discount rate,Reinvestment rate)

1. RESTAURANT

Discount rate 9%
Reinvestment rate 9%
Time Period Cash Flows
0 -1410000
1 230000
2 270000
3 290000
4 290000
5 290000
6 1730000
MIRR 16.37%

FV (Restaurant) = $230,000 × (1.09)5 + $270,000 × (1.09)4 +$290,000 × (1.09)3 + $290,000 × (1.09)2 + $290,000 × (1.09)1 +$1,730,000 × (1.09)0 = $3,501,217.95

MIRR = ($3,501,217.95 / $1,410,000)1/6 – 1 = 16.37%

2. SPORTS FACILITY

Discount rate 13%
Reinvestment rate 11.5%
Time Period Cash Flows
0 -2350000
1 430000
2 430000
3 430000
4 2760000
MIRR 16.78%

FV (Sports Facility) = $430,000 × (1.13)3 + $430,000 × (1.13)2 +$430,000 × (1.13)1 + $2,760,000 × (1.13)0 = $4,415,412.71

MIRR = ($4,415,412.71 / $2,350,000)1/4 – 1 = 16.78%

3. Adjust the Restaurant project to shorter project’s life (4years)

FV (Restaurant) = $230,000 × (1.09)3 + $270,000 × (1.09)2 +$290,000 × (1.09)1 + $290,000 × (1.09)0 + $290,000 × (1.09)-1 +$1,730,000 × (1.09)-2 = $2,946,905.10

MIRR = ($2,946,905.10 / $1,410,000)1/4 – 1 = 20.24%

3. Adjust the shorter project (Sports Facility) to the longerprojects life (6 years):

FV (Sports Facility) = $430,000 × (1.13)5 + $430,000 × (1.13)4 +$430,000 × (1.13)3 + 2,760,000 × (1.13)2 = $5,638,040.49

MIRR = ($5,638,040.49 / $2,350,000)1/6 – 1 = 15.7%

Adjusting for unequal lives changes thedecision as:

(a) Comparing 4-year MIRRs of Restaurant (20.24%) and SportsFacility (16.78%) reveals that the Restaurant project isbetter.

(b) Comparing 6-year MIRRs of Restaurant (16.37%) and SportsFacility (15.70%) reveals that the Restaurant project isbetter.

However, without adjusting for unequal lives, MIRR of SportsFacility (16.78%) was looking more attractive than MIRR ofrestaurant (16.37%).


 
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