In: Finance
A mining company is deciding whether to open a strip mine, which costs $2.5 million. Cash inflows of $13.5 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12 million, payable at the end of Year 2.
What is the project's MIRR at WACC = 10%?
What is the project's MIRR at WACC = 20%?
Now let us look up the formulae of MIRR and get the answer:-
MIRR=[(FV of Cash Inflows/PV of cash Outflows) ^ (1/n)]-1= answer
1. MIRR at WACC=10%
Let us write all the variables:-
Initial Cost=$2.50 million
Cash Inflow=$13.50 milllion
Cost to be incurred at the end of 2nd year=$12 million
WACC=10%
MIRR=[(13.50*1.10/2.50+12/1.10*1.10) ^ (1/2)]-1
MIRR=[(14.85/12.4174) ^ (1/2)]-1
MIRR=Square root of 1.1959=1.0936-1=9.36%
2. MIRR at WACC=20%
Let us write all the variables:-
Initial Cost=$2.50 million
Cash Inflow=$13.50 milllion
Cost to be incurred at the end of 2nd year=$12 million
WACC=20%
MIRR=[(13.50*1.20/2.50+12/1.20*1.20) ^ (1/2)]-1
MIRR=[(16.20/10.8333) ^ (1/2)]-1
MIRR=Square root of 1.4954=1.2229-1=22.29%.