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A mining company is deciding whether to open a strip mine, which costs $2.5 million. Cash...

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 $11 million, payable at the end of Year 2. Find the project's MIRR at WACC = 10% and MIRR at WACC = 20%.

Solutions

Expert Solution

To Find MIRR, we need to discount all the cash outflow/ negative cashflows to year =0 and all the positive cashflow at year=2 with at the discount rate or WACC.

Cash out Flow ( Initial expendititure of 2.5 million at t= 0 and 11 million at year =2)

Cash inflow ( 14million at the year 1)

At WACC = 10 %

Total Negative Cashflow at year=0

2500000 + 11000000 x (1.1)-2 = 11590909

Total Positive cashflow at year = 2

14000000 x 1.11 = 15400000

11590909 x ( 1 + MIRR )2 = 15400000 =======> MIRR = 15.266 %

Year0 Year1 Year2
Cashflow -2500000 14000000 -11000000
Discounting all (-) cashflow at year 0 and (+) cashflow at year 2 , @ WACC = 10%
Year 0 Year 2
(-) Cashflow -2500000 15400000
-9090909
Total Cash outflow -11590909 15400000
MIRR 15.266%

--------------------------------------------------------------------------------------------------------------------------------------------------------

Repeating the above procedure at WACC = 20 %

Year0 Year1 Year2
Cashflow -2500000 14000000 -11000000
Discounting all (-) cashflow at year 0 and (+) cashflow at year 2 , @ WACC = 20%
Year 0 Year 2
(-) Cashflow -2500000 16800000
-7638889
Total Cash outflow -10138889 16800000
MIRR 28.724%

jeff jeffy answered 2 years ago
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