Strip Mining Inc. can develop a new mine at an initial cost of $14 million. The

Question

Strip Mining Inc. can develop a new mine at an initial cost of $14 million. The mine will provide a cash flow of $42 million in 1 year. The land then must be reclaimed at a cost of $29 million in the second year.

What are the IRRs of this project? (Enter your answers in ascending order. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Should the firm develop the mine if the discount rate is 3%? 13%? 80%? 120%? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

Strip Mining Inc. can develop a new mine at an initial cost of $14 million. The mine will provide a cash flow of $42 million in 1 year. The land then must be reclaimed at a cost of $29 million in the second year.

Explanation / Answer

Solution.

2.

3% = Yes

13% Yes

80% yes

120% No

Year 0 1 2 Net cash flow (14,000,000) 43,000,000 (29,000,000) PV factor 100% 97% 94% PV of net cash flow (14,000,000) 41,747,573 (27,335,281) Cumulative PV (14,000,000) 27,747,573        412,291 Net present value       412,291

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