Question

You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs

$5.32

million up front and is expected to generate

$1.15

million per year for

10

years and then have some shutdown costs at the end of year

11.

Use the MIRR approach to find the maximum shutdown costs you could incur and still meet your cost of capital of

14.8%

on this project.

Answer 1

The maximum shutdown costs allowable to still have a positive NPV is:

NPV = PV of Cash Inflows - PV of Cash Outflows

0 = [Annual Cash Inflows*{(1-(1+r)^-n)/r}] - Initial cost of project - [Shutdown Cost/(1 +r)¹¹]

0 = [$1,150,000*{(1-(1+0.148)^-10)/0.148}] - $5,320,000 - [C11/(1+0.148)¹¹]

0 = [$1,150,000*{0.7485/0.148}] - $5,320,000 - [C11/4.5642]

C11/4.5642 = [$1,150,000*5.0573] - $5,320,000

C11/4.5642 = $5,815,853.21 - $5,320,000

C11 = $495,853.21 * 4.5642 = $2,263,152.92