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.

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Business

Kali Martin

22 September, 15:13

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.

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Douglas Lin · Answer 1

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%.