Question

A mining company is deciding whether to open a strip mine, which costs $2.5 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $11.5 million, payable at the end of Year 2. a. Plot the project's NPV profile. | NPY (Millions of Dollas) NPV (Millions of Dollas) NPV (Millions of Dollas) NO O Io Ouano ооо ама to ou bo 100 200 300 400 WACC(%) 200 300 400 WACC(%) 100 200 300 NPVT (Millions of Dollas) ܒܝܗܚܗ݀ܝ ܗܘ . 100 200 300 400 WACC(%) The correct sketch is -Select- . b. Should the project be accepted if WACC = 10%? -Select- Should the project be accepted if WACC = 20%? -Select-

Answer 1

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i v W a ax 2 05:09 ENG | 17-03-2020 2 ... X LR356 x : u LK LL LM EN LO LP LQ / LR L S LTD 355 356 357 358 [=NPV(LL366,$LM$361:$LM$362) +$LM$360] 359 (a) YEAR CFAT $ 2.00 360 0 361 1 -2.5 13.5 -11.5 $ 1.50 HALL IIIIIII 2 $ 1.00 100 D IN IN 362 363 364 365 366 367 DISCOUNT RATE NPV ti 0% $ 0.50 0.50 I NNI NPV -NPV 368 $ 0.00 0% 100% 200% 300% 400% 500% 600% 700% 800% 369 370 371 372 20% 50% 80% 100% 200% 300% 500% 750% $ -0.50 $ 0.76 $ 1.39 $ 1.45 $ 1.38 $ 0.72 $ 0.16 $ -0.57 Ś -1.07 Ś -0.50 373 $-1.00 $ -1.50 - RATE 374 375 376 377 378 ANSWER: CORRECT SKETCH ܠܘܒܟ AFAT ... RELEVANT MI-np-ir NPV | BETA LEVERED REPLACEMENT BOND OPTION TO WAIT | STEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRS HAMADA ... Đ : |

i v a W ax 2 05:10 ENG | 17-03-2020 E2 ... o X LK377 X fc U L K M LN_ LO LP LO LR LS LT A 377 378 379 YEAR CFAT WACC = 10% 20% 380 А. WACC = 381 0 -2.5 13.5 -11.5 NPV = 382 383 384 0.27 (=NPV(LP379,LM382,LM383) +LM381] NPV = 0.76 (=NPV(LP380, LM382,LM383) +LM381] 385 386 387 AT WACC = 10% YES PROJECT SHOULD BE ACCEPTED NPV IS POSITIVE 388 389 AT WACC = 20% YES PROJECT SHOULD BE ACCEPTED NPV IS POSITIVE 390 391 392 NUCLEAR PLANT 393 394 395 396 397 398 399 400 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENTBOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRSHAMADA ... Đ

i v a W ax 2 05:10 ENG | 17-03-2020 E2 ... o X LK393 . : X U L fix K LL LM LN LO LP LQ LR LS LT A 393 394 395 YEAR CFAT A. 396 397 398 0 -2.5 13.5 -11.5 399 2 MIRR 11.22% AT WACC 10% [=MIRR(LM397:LM399,10%,10%)] MIRR 24.29% AT WACC 20% [=MIRR(LM397:LM399,20%,20%)] 400 401 402 403 404 405 406 407 YES MIRR DOES LEAD TO SAME DECISION AS NPV IN THIS CASE 408 NO NOT IN ALL CASES 409 410 411 412 413 414 415 416 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENTBOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRSHAMADA ... Đ

i v a W ax 2 05:10 ENG | 17-03-2020 E2 ... o X LK393 . : X U L fix K LL LM LN LO LP LQ LR LS LT A 393 394 395 YEAR CFAT A. 396 397 398 0 -2.5 13.5 -11.5 399 2 MIRR 11.22% AT WACC 10% [=MIRR(LM397:LM399,10%,10%)] MIRR 24.29% AT WACC 20% [=MIRR(LM397:LM399,20%,20%)] 400 401 402 403 404 405 406 407 YES MIRR DOES LEAD TO SAME DECISION AS NPV IN THIS CASE 408 NO NOT IN ALL CASES 409 410 411 412 413 414 415 416 ... RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENTBOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE SLM GOLF IRR MACRSHAMADA ... Đ