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 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 for 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.

              a. What are the project’s NPV and IRR?

              b. Should this project be undertaken if environmental impacts were not a consideration?

              c. How should environmental effects be considered when evaluating this, or any other,

                  project? How might these concepts affect the decision in part b?

Explanation / Answer

Question a Pv Factor Year Cash Flows at 14% 0 $ -1,065,000.00 1.000000 $ -1,065,000.00 1 $       350,000.00 0.877193 $       307,017.54 2 $       350,000.00 0.769468 $       269,313.63 3 $       350,000.00 0.674972 $       236,240.03 4 $       350,000.00 0.592080 $       207,228.10 5 $       350,000.00 0.519369 $       181,779.03 Total $       685,000.00 $       136,578.34 Initial cash flows=900,000+165000 = $1,065,000 So, NPV = 136,578.34 Present Value at   Year Cash Flows 17% 18% 19% 19.22% 20% 21% 0 $ -1,065,000.00 $ -1,065,000.00 $ -1,065,000.00 $ -1,065,000.00 $ -1,065,000.00 $ -1,065,000.00 $ -1,065,000.00 1 $       350,000.00 $       299,145.30 $       296,610.17 $       294,117.65 $       293,581.31 $       291,139.22 $       288,737.43 2 $       350,000.00 $       255,679.74 $       251,364.55 $       247,157.69 $       246,257.10 $       242,177.27 $       238,198.00 3 $       350,000.00 $       218,529.69 $       213,020.81 $       207,695.53 $       206,561.37 $       201,449.43 $       196,504.79 4 $       350,000.00 $       186,777.52 $       180,526.11 $       174,534.06 $       173,264.45 $       167,570.95 $       162,109.40 5 $       350,000.00 $       159,638.90 $       152,988.23 $       146,667.28 $       145,334.87 $       139,389.93 $       133,734.43 Total $       685,000.00 $         54,771.16 $         29,509.86 $           5,172.21 $                  -0.91 $       -23,273.20 $       -45,715.96 Present Value of the project is zero when interest rate is 19.22. So IRR = 19.22% Question b Without environmental consideration the project should not be untertaken.

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