A mining company is deciding whether to open a strip mine with an initial outlay at t = 0 of $1.5 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land must be returned to its natural state so there is a cash outflow of $11.5 million, payable at the end of Year 2. a. Select the project's NPV profile. NPV (Millions of Dollars) (Millions of Dollars (Milions of Dollars) །།། 2.5 1.5 100 WACC (%) 300 400 500 WACC (%) WACC (%) NPV (Millions of Dollars) D 2.5 1.5 0.5 0.5 100 200 300 400 500 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. What is the project's MIRR at WACC = 10%? Do not round intermediate calculations. Round your answer to two decimal places. % What is the project's MIRR at WACC = 20%? Do not round intermediate calculations. Round your answer to two decimal places. % 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- ✔

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter10: The Basics Of Capital Budgeting: Evaluating Cash Flows
Section: Chapter Questions
Problem 19P
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A mining company is deciding whether to open a strip mine with an initial outlay at t = 0 of $1.5 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land
must be returned to its natural state so there is a cash outflow of $11.5 million, payable at the end of Year 2.
a. Select the project's NPV profile.
NPV
(Millions
of Dollars)
(Millions
of Dollars
(Milions
of Dollars)
།།།
2.5
1.5
100
WACC (%)
300
400
500
WACC (%)
WACC (%)
NPV
(Millions
of Dollars)
D
2.5
1.5
0.5
0.5
100
200 300 400
500
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. What is the project's MIRR at WACC = 10%? Do not round intermediate calculations. Round your answer to two decimal places.
%
What is the project's MIRR at WACC = 20%? Do not round intermediate calculations. Round your answer to two decimal places.
%
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- ✔
Transcribed Image Text:A mining company is deciding whether to open a strip mine with an initial outlay at t = 0 of $1.5 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land must be returned to its natural state so there is a cash outflow of $11.5 million, payable at the end of Year 2. a. Select the project's NPV profile. NPV (Millions of Dollars) (Millions of Dollars (Milions of Dollars) །།། 2.5 1.5 100 WACC (%) 300 400 500 WACC (%) WACC (%) NPV (Millions of Dollars) D 2.5 1.5 0.5 0.5 100 200 300 400 500 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. What is the project's MIRR at WACC = 10%? Do not round intermediate calculations. Round your answer to two decimal places. % What is the project's MIRR at WACC = 20%? Do not round intermediate calculations. Round your answer to two decimal places. % 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- ✔
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