11-19

Multiple IRRS AND MIRR

A mining company is deciding whether to open a strip mine, which costs $2 million. Cash inflows of $13 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.

A. Plot the project%u2019s NPV profile.

B. Should the project be accepted if WACC = 10%? If WACC =20%? Explain your reasoning.

C. Think of some other capital budgeting situations in which negative cash flows during or at the end of the project%u2019s life might lead to multiple IRRs.

D. What is the project%u2019s MIRR at WACC = 10% ? At WACC = 20%? Does MIRR lead to the same accept/reject decision for this project as the NPV method? Does the MIRR method always lead to the same accept/reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size.)

A.