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 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 18%. 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

total investment = 900,000+165,000 = $1065000

Cash inflow per year = $350000 and time = 5 year

1.

NPV = Present value of cash inflow - investment

       = 350000*(1-1/1.18^5)/.18 - 1065000 = 1094509.85 - 1065000 = $29509.85 = $29510 (in round figure)

2.

IRR is the rate at which present value of cash inflow will be equal to initial investment.

at 19% interest rate

PV of cash inflow =1070172

at 20% interest rate

PV of cash inflow = 1046714

So.as per the method of intrapolation

IRR = 19% + ((1070172 - 1065000)*(20% -19%)/(1070172 - 1046714)) =19%+ .22%

IRR =19.22%

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