South American Mining
Suppose that a mining operation has spent $8 million developing an ore deposit in South America. Current expectations are that the deposit will require two years of development and will result in a realizable cash flow of $10 million at that time. The company engineer has discovered a new way of extracting the ore in only one year, but the procedure would necessitate an immediate outlay of $1 million.
Required:
a. Compute the IRR for the new outlay. (Note: There are two solutions! One is 787 percent. Find the other one.)
b. Based on your answer to part (a), use the IRR criterion to determine if the company should make the outlay. Assume the market interest rate is 15 percent on one- and two-year bonds.
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