A firm is considering a mining project with the following ca

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.)

Solution

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

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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.