11-19 Multiple IRRS AND MIRR A mining company is deciding whether to open a stri

Question

11-19

Multiple IRRS AND MIRR

A mining company is deciding whether to open a strip mine, which costs $2 million. Cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12 million, payable at the end of Year 2.

A.      Plot the project%u2019s NPV profile.

B.      Should the project be accepted if WACC = 10%? If WACC =20%? Explain your reasoning.

C.      Think of some other capital budgeting situations in which negative cash flows during or at the end of the project%u2019s life might lead to multiple IRRs.

D.      What is the project%u2019s MIRR at WACC = 10% ? At WACC = 20%? Does MIRR lead to the same accept/reject decision for this project as the NPV method? Does the MIRR method always lead to the same accept/reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size.)

A.      

Explanation / Answer

a. 10% 20% 10% 20% Y0 -2 1 1       (2.00)          (2.00) Y1 13          0.91          0.83       11.82         10.83 Y2 -12          0.83          0.69       (9.92)          (8.33) Y3 4000          0.75    3,005.26       (0.10)           0.50

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