<p>A mining company is considering whether to develop a mining property. It is e

Question

<p>A mining company is considering whether to develop a mining property. It is estimated that an immediate expenditure of 7,000,000$ will be needed to bring the property into production. Thereafter, the net cash inflow will be 1, 700, 000$ at the end of each year for the next 10 years. An additional expenditure of 3, 200, 000$ at the end of 11 years will have to be made to restore the property to an attractive condition. On projects of this type the company would expect to earn at least j = 20%. Advise the company whether the project is profitable.</p>

Explanation / Answer

Present value of Annuity of 1, 700, 000$ for 10 years at 10% = 6.14457 x 1, 700, 000 = $10,445,769 Less: Initial investment $7,000,000 Present value of 3,200,000 = .38554 x 3,200,000 $1,233,728 = $8,233,728 Net Income = 2,212,041 Net income $2,212,041 is 26.86% of 8,233,728. Hence the project is profitable.

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