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

You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $ 5.34million up front and is expected to generate $ 1.11 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.

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Initial project cost = $5.34 Million Annual cash inflows - S1.11 Million Term for benefits 10 Years Lets assume maximum shutdown cost at the end of Year 1 1 = X Cost of capital = 14.8% To accept project with maximum shutdown cost, present value of cash inflows should be equal to present value of cash outlows. Initial project cost+ Shutdown cost *PVIF(Ke, 11) - Annual cash inflows * PVIFA(Ke, 10) S5.34 Million+ X * PVIF(14.8% , 11)-S 1.11 Million * PVIFA(14.8% , 10) S5.34 Million +X* 0.2191- $1.11 Million 5.0573 $5.34 Mllion +X * 0.2191 $5.613603 Million X * 0.2191 - S5.613603 Million - S5.34 Million X - S0.273603 Million 0.2191 - $1.248758558 Million - S1.25 Milion (Rounded) Ans: Maximum acceptable shutdown cost S1.25 Milon (Approximately)

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