NPV and IRR Analysis After discovering a new gold vein in the Colorado mountains
ID: 2725911 • Letter: N
Question
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.
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.
%
Should this project be undertaken if environmental impacts were not a consideration?
-Select-YesNoItem 3
How should environmental effects be considered when evaluating this, or any other, project?
-Select-IIIIIIItem 4
I. Environmental effects should be treated as sunk costs.
II. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).
III. Environmental effects should be ignored since they would have no effect on the project's profitability.
Explanation / Answer
Assuming the net cash flow is inclusive of depreciation , so depreciation not considered separately NPV calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Mining Investment with installation (1,065,000) Net Cash inflow 350,000 350,000 350,000 350,000 350,000 Net Cash flow (1,065,000) 350,000 350,000 350,000 350,000 350,000 PV factor @14% 1 0.877 0.769 0.675 0.592 0.519 PV of Net Cash flows (1,065,000) 307,018 269,314 236,240 207,228 181,779 NPV =Sum of PV of Net cash flows 136,578 IRR Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Mining Investment with installation (1,065,000) Net Cash inflow 350,000 350,000 350,000 350,000 350,000 Net Cash flow (1,065,000) 350,000 350,000 350,000 350,000 350,000 PV factor @19.217% 1 0.839 0.704 0.590 0.495 0.415 PV of Net Cash flows (1,065,000) 293,582 246,259 206,563 173,267 145,337 NPV =Sum of PV of Net cash flows 9 So at required rate of return 19.217% , the NPV is close to 0. So IRR =19.217% The Project should be accepted as it has positive NPV and IRR greater than cost of capital. How should environmental effects be considered when evaluating this, or any other, project? Correct Option is : II. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).
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