Question
In: Finance
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% | ||
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