Question

An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000 . If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile?A) $2.62 millionB) $3.21 millionC) $2.91 millionD) $3.50 million

Answer 1

Answer:

C) $2.91 million

Explanation:

In order for the project to be worthwhile, the sum of the present values of each year's cash flow minus the upfront cost must be equal or greater than 0. Therefore, the project ceases to be worthwhile when:

$0 = C+\frac{900,000}{1+0.044}+\frac{900,000}{(1+0.044)^2}+\frac{900,000}{(1+0.044)^3} +\frac{900,000}{(1+0.044)^4} -\frac{400,000}{(1+0.044)^5}\\C = 2,913,821 = 2.91\ million$

The project ceases to be worthwhile when upfront costs exceed $2.91 million