Question

After discovering a new gold vein in the Colorado mountains, CTC mining Corporation must decide whether to go ahead and develop the deposit. The most cost effective method of mining the gold is sulfuric acid extraction. Before proceeding with the extraction CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation The mined gold will net the firm an estimated $350,000 each year for the 5 year life of the vein. CTC's cost of capital is 14%. For purposes of this problem, assume the cash inflows occur at the end of the year. What are the project's NPV and IRR? а. b. Should the project be undertaken if environmental impacts are ignored? (i.e. focus only on the quantitative factors of the problem)

Answer 1

a. NPV = present value of cash inflow- the present value of cash outflow.

NPV = $136,578.34

IRR: It is the discount rate at which the present value of projects cash outflows (cost) is equal to the present value of projects cash inflow.

IRR= 19.22%

b. The company must accept the project because npv is positive and internal rate of return is greater than the cost of capital.

NPV:- 5 3,50,000 -- (1+0.14). (900,000 + 165,000) 021 = $ 136,578.34 IRR - 5 000 + 165,000) 3,50,000 = (900,000 CITIRR) 19.22% IRR =