Problem 10-12 NPV and IRR Analysis After discovering a new gold vein in the Colo

Question

Problem 10-12
NPV and IRR Analysis

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 gold is sulfuric acid extraction, a process that results in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year over the 5-year life of the vein. CTC's cost of capital is 14%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

Explanation / Answer

NPV = -900,000 - 165,000 + 350,000 / ( 1 + 0.14)^1 + + 350,000 / ( 1 + 0.14)^2 ++ 350,000 / ( 1 + 0.14)^3 + 350,000 / ( 1 + 0.14)^4 + 350,000 / ( 1 + 0.14)^5

= $136578.3

IRR = Use the IRR function in Excel and input the below array as values

The output is 19.2%

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