Reference no: EM131850688

Montana Mines is evaluating ways to increase the company's valuation over the next five years in order to sell the business. After discussions with Senior Executives and the Board of Directors, the company has narrowed down their plan to a mutually exclusive decision between two separate projects. Project A, due to specific changes in capital structure that must be made to implement it, has a discount rate of 16.50%, while the discount rate for Project B is only 13.50%. To implement project A will require an up front cost of $2,300,000. No cash flows will be generated in year 1, but starting in year 2 Project A will generate $800,000 in cash flow. Cash flows for project A will increase by 15% each year until the end of the project in year 5. Project B will require an up front cost of only $500,000. Positive cash flows for Project B will begin in year 1 and are expected to be $250,000. After Year 1, Project B's cash flows are expected to increase by 10% each year through year 4. In Year 5, Project B is expected to incur a significant expense for "clean-up cost", leading to a projected negative cash flow in year 5 of -$500,000. Analyze Project A and Project B by calculating Net Present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR). Given Montana Mines's risk aversion, assume a reinvestment rate of 2.75% (10 Year Treasuries) for project cash flows (Hint: this only matters for the MIRR). Using the results from your analysis, make a decision on which Project to select as a final recommendation to the Board of Directors.