Question

Sa Homework: Assignment 4 Score: 0 of 1 pt XP 8-24 (similar to) 4 of 10 (5 complete) HW Score: 33.33%, 3.33 of 10 Question Help 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 38 million up front and is expected to generate $1.18 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 14.9% on this project The maximum Shutdown costs allowable to stil have a positive NPV I (Round to the nearest dollar

Answer 1

We will find the PV of all the costs (cash out flows) at t = 0 and FV of all the cash inflows at t = 10.

Let the shut down cost be C. Hence, PV of all the costs at t = 0 will be = initial investment + PV of C = 5.38 + C x (1 + r)^-n = 5.38 + C x (1 + 14.9%)^-11 = 5.38 +  0.2170C

FV of all the cash inflows at the end of year 10 = A/ r x [(1 + r)^t - 1] = 1.18 / 0.149 x [(1 + 0.149)¹⁰ - 1] = 23.8417

Hence, FV = PV x (1 + r)^t

Hence, 23.841 = (5.38 +  0.2170C) x (1 + 14.9%)¹⁰ = (5.38 +  0.2170C) x 4.0105 = 21.5766 + 0.87C

Hence, C = (23.841 - 21.5766) / 0.87 = $ 2.60 mn = $ 3 mn

Hence, please enter 3 in the answer box.