11. Strip Mining, Inc. has a required rate of return of 16% on new investments.
ID: 2742297 • 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?
12. You are operating an old machine that is expected to produce a cash inflow of $5,000 in each of the next 3 years before it fails. You can replace it now with a new machine that costs $20,000, but is much more efficient and will provide a cash flow of $10,000 a year for 4 years.
a) What is the NPV of the purchase of the new machine if you take into account only the incremental cash flows it can generate relative to the old machine? Given your computations, should you replace the old machine now?
b) What is the EAA of the new machine if you look only at the cash flows associated to that machine? Does that computation suggest that you should replace your old equipment now? [Hint: the EAA of the old machine can be considered to be just the annual cash inflows it generates]
please show how to do these in a BA II plus financial calculator
Explanation / Answer
Solution.
a) What is the NPV of the purchase of the new machine if you take into account only the incremental cash flows it can generate relative to the old machine? Given your computations, should you replace the old machine now?
NO, In this condition old machine should not change.
Note :- For calculation of NPV we have must should be a discounting factore.
Year Cash Flow 0 (20,000) 1 5,000 2 5,000 3 5,000 4 5,000 Total 20,000.00Related Questions
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