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 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.)                 

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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