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Suppose that a mining operation has spent $8 million developing an ore deposit in South America. Current expectations are that the deposit will require 2 years of development and will result in a realizable cash flow of $10 million at that time. The company engineer has discovered a new way of extracting the ore in only 1 year, but the procedure would necessitate an immediate outlay of $1 million.

Required:

Compute the IRR for the new outlay. (Note: There are two solutions! One is 787%. Find the other one.)

Based on your answer to (a), use the IRR criterion to determine if the company should make the outlay. Assume the market interest rate is 15% on 1- and 2-year bonds.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91376147

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