Question

6.10 Large oil exploration corporations are using better machinery and technology to cap offshore oil spills before they become major disasters. Marine Wells, a company experienced in providing containment response equipment, has estimated the net annual savings shown below (in 9 million of cash flow) over the current and next 3 years if their equipment is contracted for by international offshore exploration corporations such as BP, Exxon-Mobil, Chevron, and Total SA. The negative amount in year 1 assumes no oil spill is experienced; the cost is that of the annual contract. Find a unique rate of return using the MIRR method if the following external rates are estimated. MARR = 12% per year Borrowing rate for extra funds = 10% per year Reinvestment rate for excess funds - 15% per year Year Cash Flow $ million و حریم بی -200 50 100

Answer 1

Future value of cash inflow at reinvestment rate = 50m * (1+0.15)^3 + 50m * (1+0.15)^1 + 100m

= 50m * (1.15)^3 + 50m * (1.15)^1 + 100m

= 233.544 m

Present value of cash outflow at borrowing rate = 200m / (1+0.10)^1

= 200 m / 1.1

= 181.818m

Let ERR be I%, then

181.818m *(1+i)^3 = 233.544 m

(1+i)^3 = 233.544 m / 181.818m = 1.2844932

(1+i) = 1.2844932 ^ (1/3) = 1.087036

I = 1.087036 - 1 = 0.087036

I = 8.7%