Question

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. The land must be returned to its natural state at a cost of $11.5 million, payable at the end of Year 2. Plot the project's NPV profile.     a. The correct sketch is -Select A, B, C, D Should the project be accepted if WACC = 10%? -Select-Yes or No Should the project be accepted if WACC = 20%? -Select-Yes or No 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. The input in the box below will not be graded, but may be reviewed and considered by your instructor. What is the project's MIRR at WACC = 10%? Round your answer to two decimal places. Do not round your intermediate calculations. % What is the project's MIRR at WACC = 20%? Round your answer to two decimal places. Do not round your intermediate calculations. % Does MIRR lead to the same accept/reject decision for this project as the NPV method? -Select-Yes or No Does the MIRR method always lead to the same accept/reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size.) -Select-Yes or No

Answer 1

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GRAPH MISSING

C W ? ENG 06:05 31-07-2020 99+ 29 Х LK538 . LK LL LM LN LO LP LQ LR LS LT LU 537 (=NPV(LL548,$LM$542:$LM$543) +$LM$541] 538 539 540 541 YEAR CFAT 0 -2 $ 2.00 1 13 2 -11.5 542 543 544 545 546 $ 1.50 NPV PROFILE $ 1.00 RATE NPV 547 548 549 550 551 $ 0.50 0% 50% 100% NPV NPV $ -0.50 $ 1.56 $ 1.63 $ 1.06 $ 0.53 $ 0.14 $ -0.15 200% 300% $ 0.00 552 0% 100% 200% 300% 400% 500% 600% 553 400% $ -0.50 554 500% 555 $ -1.00 556 RATE 557 558 a ANSWER: SKETCH MISSING 559 560 b PV FACTOR BETA LEVERED PV OF CCA REPLACEMENT PV FACTOR OPTION TO WAIT PV OF STEIN indiffEPS EBIT HPR GMAM EAC MACRS RELEVANT Ml-np-ir NPV BOND +

C w ? ENG 06:05 31-07-2020 99+ 29 Х LK562 X . LK LL LM LN LO LP LQ LR LS LT LU 558 a ANSWER: SKETCH MISSING 559 560 b 561 PV FACTOR PV OF PV FACTOR AT 20% YEAR CFAT PV OF CFAT A*B AT 10% CFAT A B 562 563 C 1 A*C -2.00 0 -2 1 -2.00 564 1 13 0.9091 11.82 0.8333 10.83 565 2 -11.5 0.8264 -9.50 0.6944 -7.99 566 NPV = 0.31 NPV = 0.85 567 568 AT WACC = 10% 569 YES NPV IS POSITIVE 570 571 AT WACC = 20% 572 YES NPV IS POSITIVE 573 Vertical (Value) Axis Major Gridlines 574 C 575 576 577 578 579 580 581 HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT +

C w ? ENG 06:05 31-07-2020 99+ 29 Х LK597 . LK LL LM LN LO LP LQ LR LS LT LU YEAR CFAT 574 C 575 576 577 578 579 A 0 -2 1 13 -11.5 2 WACC 10% MIRR 11.49% (=MIRR(LM578:LM580,10%,10%)] 20% MIRR 24.99% (=MIRR(LM578:LM580,20%,20%)] 580 581 582 583 584 585 586 587 588 589 590 YES YES, IN THE ABOVE CASE, MIRR LEAD TO SAME DECISION AS NPV NO NO, MIRR WILL NOT ALWAYS LEAD TO SAME DECISION AS NPV IN MUTUALLY EXCLUSIVE CASES WHERE PROJECT DIFFERS IN SIZE Vertical (Value) Axis Major Gridlines 591 592 593 594 595 596 597 HPR GMAM EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT +