The Ulmer Uranium Company is deciding whether or not it should open a strip mine, the net cost of which is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land must be returned to its natural state at a cost of $25 million, payable at the end of Year 2.
a. Plot the project’s NPV profile.
b. Should the project be accepted if r = 8%? If r = 14%? Explain your reasoning.
c. Can you think of some other capital budgeting situations where negative cash flows during or at the end of the project’s life might lead t multiple IRRs?
d. What is the project’s MIRR at r = 8%? At r = 14%? Does the MIRR method lead to the same accept/reject decision as the NPV method?