You are evaluating Project A (a gold mine) and project B (a copper mine) being c

Question

You are evaluating Project A (a gold mine) and project B (a copper mine) being considered by BHP. They are mutually exclusive projects and both have negative cash flows in years 0 to 3, positive cash flows in year 4, and negative cash flows in years 5-7.

Would you use the NPV or IRR to select between these projects? Why? (2 marks)

In year 4 Project A will sell 100 tonnes of gold for $500 per tonne and incur costs of $10,000. The yearly depreciation on the mine is $20,000 and the corporate tax rate of 30%. What is the FCF for Project A in year 4 and how would this figure be used in an NPV analysis? (3 marks)

Explanation / Answer

NPV, because NPV recognises timing value of money in a better way and gives the actual value addition of the project over its entire life.

FCF = ($500 * 100 - $10,000 - $20,000) * (1 - 30%) + $20,000

= $34,000

In NPV analysis, the PV of the FCF would be added to the PV of the other yearly cashflows.

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