Compute internal rate of return, Business Economics

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You are evaluating two (mutually exclusive) methods of strip-mining a resource-rich area. The alternatives are very similar, though one important difference is in the scale of the two projects.

Here are the estimated cash flows:

t=0 t=1 t=2 t=3

Method A -205 -30 1055 -862

Method B -100 -20 525 -425

a. If your firm's discount rate for strip-mining projects is 20%, which project do you prefer and why?

b. Each method has two IRRs. Compute all four IRRs to at least one decimal place (e.g. 12.3%).

c. i. Under what discount rate assumptions are you indifferent between the two projects?

ii. Compute to at least one decimal place and explain what you should do (Accept? Reject? Other?) If your discount rate made you indifferent between the two methods.

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