e) Construct NPV profiles for Projects A and B. f) What is each project’s MIRR at a WACC of 18 percent?
3) Multiple IRRs and MIRR. A mining company is deciding whether to open a strip mine, which costs $2 million. Net cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12 million, payable at the end of Year 2. a) Plot the project’s NPV profile. b) Should the project be accepted if WACC = 10%? If WACC = 20%? Explain your reasoning. c) Can you think of some other capital budgeting situation in which negative cash flows during or at the end of the project’s life might lead to multiple IRRs? d) What is the project’s MIRR at WACC = 10%? At WACC = 20%? Does MIRR lead to the same accept/reject decision for this project as the NPV method? Does the MIRR method alwayslead to the same accept /reject decision as NPV? (Hint: Consider mutually exclusive projects that differ in size.)
4) Choosing mandatory projects on the basis of least cost. K. Kim Inc. must install a new air conditioning unit in its main plant. Kim absolutely must install one or the other of the units because otherwise the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs). HCC has a high capital cost but relatively low operating costs, while LCC has a low capital cost but higher operating costs because it uses more electricity. The units’ costs are shown below. Kim’s WACC is 7 percent.