Question

A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then how many internal rates of return does this project have? Calculate the MIRR for this project using each of the three methods.

Answer 1

Answer:

Since the sign of cash flow changes twice hence there are two IRRs.

PV of cash outflows =14+6/(1+13%)^6 =16.8819

FV of cash inflows =7*(1+13%)^5+7*(1+13%)^4+7*(1+13%)^3+7*(1+13%)^2+7*(1+13%)^1=51.2589

MIRR=(FV/PV)^(1/n)-1 =(51.2589/16.8819)^(1/6)-1 =20.33%

MIRR = 20.33%.

Explanation: