11. Strip Mining, Inc. has a required rate of return of 16% on new investments.
ID: 2742249 • Letter: 1
Question
11. Strip Mining, Inc. has a required rate of return of 16% on new investments. It can develop a new mine at an initial cost of $5 million. The mine would provide a cash flow of $30 million in 1 year. The land then must be reclaimed at a cost of $28 million in the second year.
a) How many IRR’s will this project have?
b) What will be all of the IRR’s for this project?
c) What will be the MIRR of the mine if we bring all negative cash flows to the present and incorporate them into the initial cash outflow?
d) What will be the MIRR of the mine if we send all the future cash flows to the end of the timeline?
e) What will be the MIRR of the mine if we send all the negative cash flows to the present and incorporate them into the initial cash outflow and we send all the positive cash flows to the end of the timeline?
f) Would you accept this project based on those MIRR computations?
Explanation / Answer
A) In the case of positive cash flows followed by negative ones and then by positive ones, the IRR may have multiple values.
B) 16 %
C) In given we assume that cost of Capital is 14 % and Re investment rate is 14 %
MIRR will be 2%
D ) - 37 %
E ) -5%
F ) Yes MIRR calculates the return on investment based on the more prudent assumption that the cash inflows from a project shall be re-invested at the rate of the cost of capital. As a result, MIRR usually tends to be lower than IRR
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