The Utah Mining Corporation is set to open a gold mine near Provo, Utah. Accordi

Question

The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,900,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $395,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $450,000 at the end of Year 11.

What is the IRR for the gold mine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

The Utah Mining Corporation requires a return of 8 percent on such undertakings. Should the mine be opened?

The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,900,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $395,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $450,000 at the end of Year 11.

Explanation / Answer

Cash flow in year 0 = - 2900000

Cash flow in year 1 = 395000

Cash flow in year 2 = 395000*(1+8%) = $ 426600

Cash flow in year 3 = 395000*(1+8%)^2 = $ 460728

Cash flow in year 4 = 395000*(1+8%)^3 = $ 497,586.24

Cash flow in year 5 = 395000*(1+8%)^4 = $ 537,393.14

Cash flow in year 6 = 395000*(1+8%)^5 = $     580,384.59

Cash flow in year 7 = 395000*(1+8%)^6 = $ 626,815.36

Cash flow in year 8 = 395000*(1+8%)^7 = $ 676,960.59

Cash flow in year 9= 395000*(1+8%)^8 = $ 731117.43

Cash flow in year 10 = 395000*(1+8%)^9 = $ 789606.83

Cash flow in year 11 = 395000*(1+8%)^10 - 450000 = $ 402775.37

IRR = irr(values)

IRR = irr({-2900000.00 ,395000.00 ,426600.00 , 460728.00 , 497586.24 , 537393.14,580384.59 ,626815.36 ,676960.59, 731117.43,789606.83,402775.37})

IRR = 13.59%

Answer

IRR = 13.59%

b.The Utah Mining Corporation requires a return of 8 percent on such undertakings. Should the mine be opened?

Yes

Notes : Since IRR is greater than required return than the mine would be opened

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