Question

You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $104 million upfront. Once​ built, it will generate cash flows of

$17 million at the end of every year over the life of the plant. The plant will be useless

20years after its completion once the mine runs out of ore. At that point you expect to pay $236 million to shut the plant down and restore the area to its pristine state. Using a cost of capital of 11%​:

a. What is the NPV of the​ project?

b. Is using the IRR rule reliable for this​ project? Explain.

c. What are the IRRs of this​ project?

a. What is the NPV of the​ project?

The NPV of the project is $............ million. ​ (Round to one decimal​ place.)

b. Is using the IRR rule reliable for this​ project? Explain.(Select the best choice​ below.)

A. Yes, the IRR rule is​ reliable, because the project has a negative net present value.

B. No, the IRR rule is not​ reliable, because the project has a negative cash flow that comes after the positive ones.

C. No, the IRR rule is not​ reliable, because the project has a negative net present value.

D. Yes, the IRR rule is​ reliable, because the project has a negative cash flow that comes after the positive ones.

c. What are the IRRs of this​ project?

The IRRs of this project in ASCENDING order are ……….​% and …………​%. (Round to two decimal​ places.)

Answer 1

a. Initial Investment =104 million
Annual Cash flows =17 million
Rate =11%
Payoff =236
Number of Years =20
Since cash flows begin from end of year 2 to year 21
NPV of Project =PV of Cash Flows -PV of Payoff at shutdown-Initial Investment
=(17*((1-(1+11%)^-20)/11%)/(1+11%)-236/(1+11%)^21-104 =-8.41 or -8.4

B.option b is correct  No, the IRR rule is not​ reliable, because the project has a negative cash flow that comes after the positive ones.

c. IRR of the project using excel formula

IRRS are 0% and 8.94%

	A	B	C	D	E	F	G	H	I	J	K	L	M	N	O	P	Q	R	S	T	U	V
1	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20	21
2	-104	0	17	17	17	17	17	17	17	17	17	17	17	17	17	17	17	17	17	17	17	-219
				excel formula
		IRR	0.000%	IRR(A2:V2;0%)
		IRR	8.935%	IRR(A2:V2;4%)