After discovering a new gold vein in the Colorado mountains, CTC Mining Corporat

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 gold is sulfuric acid extraction, a process that could result 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 15%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. What is the project's NPV? Round your answer to the nearest dollar. What is the project's IRR? Round your answer to two decimal places.

Explanation / Answer

Project NPV :

Year Cash Flow PVAF(15%,5)   Present Value

  0 (900000+ 165000) 1 1065000

1-5 350000 3.352 1173200

NPV = present value of cash inflow - present value of cash outflow

   = $1173200 - $ 1065000

= $108200

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