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Star Industries owns and operates landfills for several municipalities throughout the Midwestern part of the U.S. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill​ (required by federal​ law) that has capacity for five years. The ​$9.8 million expenditure required to construct the new landfill results in negative cash flows at the end of years​ 5, 10, and 15. This change in sign on the stream of cash flows over the​ 20-year contract period introduces the potential for multiple​ IRRs, so​ Star's management has decided to use the MIRR to evaluate new landfill investment contracts. The annual cash inflows to Star begin in year 1 and extend through year 20 are estimated to equal ​$4.1 million​ (this does not reflect the cost of constructing the landfills every five​ years). Star uses a 10.2​% discount rate to evaluate its new​ projects, so it plans to discount all the construction costs every five years back to year 0 using this rate before calculating the MIRR. a.  What are the​ project's NPV,​ IRR, and​ MIRR? b.  Is this a good investment opportunity for Star​ Industries? Why or why​ not?

Star Industries owns and operates landfills for several municipalities throughout the Midwestern part of the U.S. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill​ (required by federal​ law) that has capacity for five years. The ​$9.8 million expenditure required to construct the new landfill results in negative cash flows at the end of years​ 5, 10, and 15. This change in sign on the stream of cash flows over the​ 20-year contract period introduces the potential for multiple​ IRRs, so​ Star's management has decided to use the MIRR to evaluate new landfill investment contracts. The annual cash inflows to Star begin in year 1 and extend through year 20 are estimated to equal ​$4.1 million​ (this does not reflect the cost of constructing the landfills every five​ years). Star uses a 10.2​% discount rate to evaluate its new​ projects, so it plans to discount all the construction costs every five years back to year 0 using this rate before calculating the MIRR. a.  What are the​ project's NPV,​ IRR, and​ MIRR? b.  Is this a good investment opportunity for Star​ Industries? Why or why​ not?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Star Industries owns and operates landfills for several municipalities throughout the Midwestern part of the U.S. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill​ (required by federal​ law) that has capacity for five years. The ​$9.8 million expenditure required to construct the new landfill results in negative cash flows at the end of years​ 5, 10, and 15. This change in sign on the stream of cash flows over the​ 20-year contract period introduces the potential for multiple​ IRRs, so​ Star's management has decided to use the MIRR to evaluate new landfill investment contracts. The annual cash inflows to Star begin in year 1 and extend through year 20 are estimated to equal ​$4.1 million​ (this does not reflect the cost of constructing the landfills every five​ years). Star uses a 10.2​% discount rate to evaluate its new​ projects, so it plans to discount all the construction costs every five years back to year 0 using this rate before calculating the MIRR.

a.  What are the​ project's NPV,​ IRR, and​ MIRR?

b.  Is this a good investment opportunity for Star​ Industries? Why or why​ not?

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