Rearden Metals is considering opening a strip mining operation to provide some o

Question

Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.


45) The number of potential IRRs that exist for Rearden's mining operation is equal to:



A) 2

B) 1

C) 0

D) 12



46) One of the IRR for Rearden's mining operation is closest to:



A) 72.0%

B) 0%

C) 12.4%

D) 10.6%

Consider the following two projects:


Project Year 0
Cash Flow Year 1
Cash Flow Year 2
Cash Flow Year 3
Cash Flow Year 4
Cash Flow Discount Rate
A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15


49) The internal rate of return (IRR) for project A is closest to:


A) 21.6%

B) 7.7%

C) 23.3%

D) 42.9%



50) The internal rate of return (IRR) for project B is closest to:


A) 23.3%

B) 21.6%

C) 7.7%

D) 42.9%

Explanation / Answer

45. Answer: A Rearden's mining operation has 2 IRR's since it has a negative cash flow in the 12th year. According to the cash flows we have to calculate the IRR and MIRR (modified internal rate of return) 46. Answer: D) 10.6% IRR for the concern can be calculated using the Excell spread sheet as follows; We have to enter the number of years in the spread sheet in a column form, from 0th year to 12 th year. and then we have to enter the cash flows according to the years. Afetr entering the cash flows we have to select the function IRR in the formula bar. And then we have to select the total cells, after selecting the cells, click to get the result. (do it just like the following one) 0 ($100,000,000) 1 $16,000,000 2 $16,000,000 3 $16,000,000 4 $16,000,000 5 $16,000,000 10.581% 6 $16,000,000 7 $16,000,000 8 $16,000,000 9 $16,000,000 10 $16,000,000 11 $16,000,000 12 -4,000,000 49). Internal rate of return of project A: Answer: A. 21.6% 0 -100 1 40 21.6% 2 50 3 60 4 0 50). Internal rate of return of project B: Answer: A. 23.3 % 0 -73 1 30 2 30 23.3% 3 30 4 30 Answer: A. 21.6% 0 -100 1 40 21.6% 2 50 3 60 4 0 50). Internal rate of return of project B: Answer: A. 23.3 % 0 -73 1 30 2 30 23.3% 3 30 4 30 Answer: A. 23.3 % 0 -73 1 30 2 30 23.3% 3 30 4 30 0 ($100,000,000) 1 $16,000,000 2 $16,000,000 3 $16,000,000 4 $16,000,000 5 $16,000,000 10.581% 6 $16,000,000 7 $16,000,000 8 $16,000,000 9 $16,000,000 10 $16,000,000 11 $16,000,000 12 -4,000,000

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