Question

MULTIPLE IRRS AND MIRR A mining company is deciding whether to open a strip mine, which costs $2.5 million. Cash inflows of $14 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12.5 million, payable at the end of Year 2. Plot the project's NPV profile. The correct sketch is . Should the project be accepted if WACC = 10%? Should the project be accepted if WACC = 20%? 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. blank 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. %

Answer 1

	Cashflows
Year 0	$                 (2,500,000)
Year 1	$                 14,000,000
Year 2	$               (12,500,000)

NPV Calculation:

WACC	NPV
0%	($1,000,000.00)
5%	($480,509.66)
10%	($93,914.35)
20%	$405,092.59
25%	$560,000.00
30%	$671,370.05

NPV Profile:

Considering the NPV values at WACC 10% and 20%, project gives positive values at 20% WACC. Hence, project should be accepted at WACC=20%.

Situations where projects needs recurring cost or maintainance cost like machinery manufacturing or oil rigging projects can be considered as capital budgeting solutions where -ve cashflows occur during or at end of project leading to multiple IRR.

MIRR Calculation:

Formula for MIRR is:

At WACC = 10%,

FV of cash inflows:

Year1 cashflow: $14,000,000*(1.1) = $ 15,400,000

PV of cash ouflowss

Year 0 Cashflow: $   (2,500,000)/(1.1)^0 =   $ (2,500,000)

Year 2 Cashflow: $   (12,500,000)/(1.1)^2 =   $ (15,125,000)

MIRR = 9.56%

At WACC = 20%,

FV of cash inflows:

Year1 cashflow: $14,000,000*(1.2) = $ 16,800,000

PV of cash ouflowss

Year 0 Cashflow: $   (2,500,000)/(1.1)^0 =   $ (2,500,000)

Year 2 Cashflow: $   (12,500,000)/(1.1)^2 =   $ (18,000,000)

MIRR = 22.58%