You are getting ready to start a new project that will incur some cleanup and sh

Question

You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $5.35 million up front and is expected to generate $1.17 million per year for 10 years and then have some shutdown costs at the end of year 11. Use the MIRR approach to find the maximum shutdown costs you could incur and still meet your cost of capital of 14 8% on this project. The maximum shutdown costs allowable to still have a positive NPV is S(Round to the nearest dollar.)

Explanation / Answer

Given,

Project Cost = $5.35 Million

Inflows = 1.17 per year

10 years life

Cost of Capital = 14.8

Sume Pv's of 10 years @ 14.8% is 5.06

By multiplying yearly inflows with sum of pv

1.17*5.06 = 5.92

So NPV is 5.92-5.35 = 0.57 Millions

11th year PV factor is 0.219

The maximum shutdown costs allowable to still have a positive NPV is 0.57/0.219 = $2.59 Millions

If the shut down cost is less than the $2.59 Million then NPV will be in positive

Year Cash Flows PV factors @ 14.8 PV of Cash flows 0 -5.35 1 -5.35 1 1.17 0.87108 1.02 2 1.17 0.758781 0.89 3 1.17 0.660959 0.77 4 1.17 0.575748 0.67 5 1.17 0.501523 0.59 6 1.17 0.436866 0.51 7 1.17 0.380546 0.45 8 1.17 0.331486 0.39 9 1.17 0.288751 0.34 10 1.17 0.251525 0.29 11 -2.59 0.219098 -0.57 NPV 0.00

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