NPV and IRR Analysis After discovering a new gold vein in the Colorado mountains
ID: 2794031 • 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 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 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.
%
Explanation / Answer
initial cash outflow = 900000+165000 1065000 Annual cash flow = 350000 for 5 years 5 year annuity factor @ 14% = 3.4331 PV of Annual cash inflows = 1201578 (350000 x 3.4331) (a) Net Present value = Pv of cash inflow i.e = 1201578 Less: Pv of cash outflow i.e. 1065000 NPV - 136578.3 (b) IRR - When we discount cashflows using IRR NPV becomes 0 PV of cash inflow - Pv of cashoutflow = o 350000 x PVAF(r, 5) - 1065000 = 0 PVAF(r,5) = 1065000/350000= 3.042857 Using Linear interpolation = r PVAF(r,5) = 14% 3.4331 r 3.042857 20% 2.9906 r-14/20-14 = (3.0486-3.4331)/(2.9906-3.4331) r-14 = {-0.3902/-0.4425 } x 6 r = 5.2915 + 14 = 19.292 (approx) Please provide feedback…. Thanks in advance… :-)
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