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. Theland must be returned to its natural state at a cost of $12 million, payable at the end ofYear 2.a. Plot the project’s 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 duringor at the end of the project’s life might lead to multiple IRRs.d. What is the project’s MIRR at WACC = 10%? At WACC =20%? Does MIRR lead tothe same accept/reject decision for this project as the NPV method? Does the MIRRmethod always lead to the same accept/reject decision as NPV? (Hint: Considermutually exclusive projects that differ in size.)
A mining company is deciding whether to open a strip mine,
which costs $2 million.
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’s 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’s life might lead to multiple IRRs.
d. What is the project’s 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.)
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