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 1 year ago

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