A firm is considering a mining project with the following cash flows (with the f
ID: 2827101 • Letter: A
Question
A firm is considering a mining project with the following cash flows (with the final cash flow being negative, perhaps due to an extensive land reclamation in the project’s final year): C0 = –$280, C1 = $280, C2 = $308, C3 = $364, C4 = $280, and C5 = –$1036. (a) From among the following multiple-choice answers, calculate this project’s internal rate(s) of return: 5.070%, 25.225%, 33.333%, 51.909%, 82.425%. (2 pts.) (b) If the required return is 30.000%, should the project be rejected or accepted? Briefly, clearly justify and explain your reasoning. (2 pts.)
Explanation / Answer
IRR – Internal rate of return = 5.07%
The IRR is obtained above by trial and error. IRR is rate where total all present and future cash flows present values is 0.
Hence, IRR = 5.07%
Check below:
Discount rate = WACC = R = 5.07%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$280.00
1.000000
-$280.00
1
$280.00
0.951746
$266.49
2
$308.00
0.905821
$278.99
3
$364.00
0.862112
$313.81
4
$280.00
0.820512
$229.74
5
-$1,036.00
0.780920
-$809.03
Total = Present values sum =
$0.00
------------------------
If required return is 30% then above project is not doable. Please reject because it is generating IRR of 5.07% vs required return of 30%
Hence, REJECT the Project.
Discount rate = WACC = R = 5.07%
Present Values
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$280.00
1.000000
-$280.00
1
$280.00
0.951746
$266.49
2
$308.00
0.905821
$278.99
3
$364.00
0.862112
$313.81
4
$280.00
0.820512
$229.74
5
-$1,036.00
0.780920
-$809.03
Total = Present values sum =
$0.00
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