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
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
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

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?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 2 images

Blurred answer
Knowledge Booster
Accounting for Long-Term contracts
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education