Accounting for Decision Making and Control 7th Edition by Jerold Zimmerman

تمرين 2

South American Mining
Suppose that a mining operation has spent $8 million developing an ore deposit in South America. Current expectations are that the deposit will require two 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 one year, but the procedure would necessitate an immediate outlay of $1 million.
Required:
a. Compute the IRR for the new outlay. (Note: There are two solutions! One is 787 percent. Find the other one.)
b. 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 percent on one- and two-year bonds.