A mining company is deciding whether to open a strip mine, which costs $2 millio

Question

A mining company is deciding whether to open a strip mine, which costs $2 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $11 million, payable at the end of Year 2.

What is the project's MIRR at WACC = 10%? Round your answer to two decimal places. Do not round your intermediate calculations.

What is the project's MIRR at WACC = 20%? Round your answer to two decimal places. Do not round your intermediate calculations.

Explanation / Answer

Cash Flows:
Year 0 = -$2,000,000
Year 1 = $13,500,000
Year 2 = -$11,000,000

Answer a.

WACC = 10%

Present Value of Cash Outflows = -$2,000,000 - $11,000,000/1.10^2
Present Value of Cash Outflows = -$11,090,909.09

Future Value of Cash Inflows = $13,500,000*1.10
Future Value of Cash Inflows = $14,850,000

WACC = (Future Value of Cash Inflows / Present Value of Cash Outflows)^(1/n) - 1
WACC = ($14,850,000 / $11,090,909.09)^(1/2) - 1
WACC = 1.33893^(1/2) - 1
WACC = 1.1571 - 1
WACC = 0.1571 = 15.71%

Answer b.

WACC = 20%

Present Value of Cash Outflows = -$2,000,000 - $11,000,000/1.20^2
Present Value of Cash Outflows = -$9,638,888.89

Future Value of Cash Inflows = $13,500,000*1.20
Future Value of Cash Inflows = $16,200,000

WACC = (Future Value of Cash Inflows / Present Value of Cash Outflows)^(1/n) - 1
WACC = ($16,200,000 / $9,638,888.89)^(1/2) - 1
WACC = 1.68069^(1/2) - 1
WACC = 1.2964 - 1
WACC = 0.2964 = 29.64%

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