Alma has used the estimates provided by Dan to determine the revenue that could

Question

Alma has used the estimates provided by Dan to determine the revenue that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $750 million today, and it will have a cash outflow of $115 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table that follows. Bullock has a 12 percent required return on all of its gold mines. Year Cash Flow 0 -750,000,000 1 140,000,000 2 180,000,000 3 210,000,000 4 230,000,000 5 205,000,000 6 185,000,000 7 160,000,000 8 110,000,000 9 -750,000,000 . Calculate the internal rate of return

Explanation / Answer

If the cash flow in year 9 is -750 then no IRR exist. (IRR is the discount rate that would make the projects NPV equal to zero) with these values the company will always have a negative NPV and thus no IRR exists. If the last years cashflow is just the expense of closing the mine (-115) then the IRR can be found in excel. IRR 7.693% year 0 1 2 3 4 5 6 7 8 9 Expenses -750 0 0 0 0 0 0 0 0 -115 Revenues 0 140 180 210 230 205 185 160 110 CF -750 140 180 210 230 205 185 160 110 -115 Disc. value -750 130 155 168 171 142 119 95 61 -59 It is solved by using solver to change the IRR rate until the sum of the discounted cash flows are equal to 0. The discounted cash flows are equal to: CF/(1+IRR)^year

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.