Fundamentals of Finance 11-19
Mining company evaluating strip mine.
$2 Million cost to open
$13 Million cash flow YR1
$12 Million cost to close and restore YR2
A) Plot project\'s NPV profile
B) Should project be accepted if WACC - 10%
Should project be accepted if WACC - 20%
D) Projects MIRR at WACC - 10%
Projects MIRR at WACC - 20%
Solution
If WACC is 10% we should reject the project since the NPV is less than zero which is -99174
But if the WACC is 20% then we should except the project since the NPV is greater than zero which is $500,000
MIRR @10% WACC:
PV cost = $2000000 + $12,000,000 / (1.10)^2 = $11,917,355
FV inflow = $13,000,000 x 1.10 = 14,300,000
Using financial calculator we will input the value as N=2, PV = - 11917355, PMT = 0 and FV = 14300000 then solve for 1/YR = MIRR = 9.54% which is less then 10% we will reject the project.
MIRR @20% WACC:
PV cost = $2000000 + $12,000,000 / (1.20)^2 = 10,333,333
FV inflow = $13,000,000 x 1.20 = 15,600,000
Using financial calculator we will input the value as N=2, PV = - 10,333,333, PMT = 0 and FV = 15600000 then solve for 1/YR = MIRR = 22.87% which is greater then 20% we will accept the project.
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Fundamentals of Finance 11-19 Mining company evaluating strip mine- $2.docx
1. Fundamentals of Finance 11-19
Mining company evaluating strip mine.
$2 Million cost to open
$13 Million cash flow YR1
$12 Million cost to close and restore YR2
A) Plot project's NPV profile
B) Should project be accepted if WACC - 10%
Should project be accepted if WACC - 20%
D) Projects MIRR at WACC - 10%
Projects MIRR at WACC - 20%
Solution
If WACC is 10% we should reject the project since the NPV is less than zero which is -99174
But if the WACC is 20% then we should except the project since the NPV is greater than zero
which is $500,000
MIRR @10% WACC:
PV cost = $2000000 + $12,000,000 / (1.10)^2 = $11,917,355
FV inflow = $13,000,000 x 1.10 = 14,300,000
Using financial calculator we will input the value as N=2, PV = - 11917355, PMT = 0 and FV =
14300000 then solve for 1/YR = MIRR = 9.54% which is less then 10% we will reject the
project.
2. MIRR @20% WACC:
PV cost = $2000000 + $12,000,000 / (1.20)^2 = 10,333,333
FV inflow = $13,000,000 x 1.20 = 15,600,000
Using financial calculator we will input the value as N=2, PV = - 10,333,333, PMT = 0 and FV =
15600000 then solve for 1/YR = MIRR = 22.87% which is greater then 20% we will accept the
project.
WACC NPV
0% $(1,000,000)
10 $Â Â Â Â (99,174)
50 $ 1,333,333
80 $ 1,518,519
100 $ 1,500,000
200 $ 1,000,000
300 $Â Â Â 500,000
400 $Â Â Â 120,000
410 $Â Â Â Â Â 87,659
420 $Â Â Â Â Â 56,213
430 $Â Â Â Â Â 25,632
450 $Â Â Â Â (33,058)
