Question

You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $ 5.39 million up front and is expected to generate $ 1.17 million per year for 10 years and then have some shutdown costs at the end of year 11. Use the MIRR approach to find the maximum shutdown costs you could incur and still meet your cost of capital of 14.9 % on this project. The maximum shutdown costs allowable to still have a positive NPV is ​$ nothing. ​(Round to the nearest​ dollar.)

Answer 1

Solution:
Let Shutdown Costs be X
Calculation of NPV of the Project
Year	Cash Flows	Discount Factor @ 14.9%	Discounted Cash Flows
A	B	C = 1/(1+14.9%)^n	D = B*C
0	-5390000	1	-5390000
1	1170000	0.870322019	1018276.762
2	1170000	0.757460417	886228.6879
3	1170000	0.65923448	771304.3411
4	1170000	0.573746283	671283.1515
5	1170000	0.499344024	584232.5078
6	1170000	0.434590099	508470.4159
7	1170000	0.378233332	442532.999
8	1170000	0.329184798	385146.2132
9	1170000	0.286496778	335201.23
10	1170000	0.249344454	291733.0113
11	X	0.217009969	0.217009969 X
Net Present value			504409.32 - 0.0217009969 X
Net Present Value > 0
504,409.32 - 0.0217009969 X > 0
0.217009969 X < 504,409.32
X > 2,321,360.13
Therefore, Maximum shutdown costs allowable to still have positive NPV is $2,321,360