Question

MULTIPLE IRRS AND MIRR A mining company is deciding whether to open a strip mine, which costs $2.5 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 million, payable at the end of Year 2. a. Plot the project's NPV profile. B NEY NPV Miliens of Dulles Men of Dole 200 3000WACC) 80 200 300 400 WACC) 200 300 400 WACC) 200300 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- c. 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. d. 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- Does the MIRR method always lead to the same accept/reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size.) -Select-

Answer 1

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C w ENG 02:43 31-07-2020 99+ 29 Х LT559 . LK LL LM LN LO LP LQ LR LS LT LU 537 538 539 540 541 (=NPV(LL548,$LM$542:$LM$543) +$LM$541] YEAR CFAT 0 -2.5 13 $ 2.00 1 2 -11 542 543 544 545 546 $ 1.50 NPV PROFILE $ 1.00 RATE NPV 547 548 549 550 551 $ 0.50 0% 50% 100% NPV NPV $ -0.50 $ 1.28 $ 1.25 $ 0.61 $ 0.06 $ -0.34 $ -0.64 200% 300% $ 0.00 552 0% 100% 200% 300% 400% 500% 600% 553 400% $ -0.50 554 500% 555 $ -1.00 556 RATE 557 ANSWER: correct sketch =D 558 a 559 560 b PV FACTOR BETA LEVERED NPV CCA PV OF REPLACEMENT PV FACTOR PV OF OPTION TO WAIT STEIN indiffEPS EBIT EAC MACRS RELEVANT Ml-np-ir BOND OCF 1 LEA ... +

02:43 C w ENG 99+ 31-07-2020 29 Х LS576 . LK LL LO LP LS LT LU LM LN PV FACTOR CFAT AT 10% PV OF LQ PV FACTOR AT 20% YEAR 560 b 561 562 563 LR PV OF CFAT A*C -2.50 A CFAT A*B -2.50 B C 0 -2.5 1 1 0.8333 564 1 13 0.9091 11.82 10.83 2 -11 0.8264 -9.09 0.6944 -7.64 565 566 NPV = 0.23 NPV = 0.69 567 568 569 AT WACC = 10% YES NPV IS POSITIVE 570 571 AT WACC = 20% 572 YES NPV IS POSITIVE YEAR CFAT A 573 574 C 575 576 577 578 579 580 581 582 583 0 -2.5 1 13 2 -11 WACC 10% MIRR 11.07% (=MIRR(LM578:LM580,10%,10%)] EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +

C w ENG 02:44 31-07-2020 99+ 29 Х LP594 . LK LL LM LN LO LP LQ LR LS LT LU 573 574 c 575 576 577 578 YEAR CFAT A 0 -2.5 1 13 2 -11 WACC 10% MIRR 11.07% (=MIRR(LM578:LM580,10%,10%)] 20% MIRR 24.04% (=MIRR(LM578:LM580,20%,20%)] 579 580 581 582 583 584 585 586 587 588 589 590 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 591 592 593 594 595 596 EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +