The L-S Mining Company is planning to open a new strip mine in western Pennsylva

Question

The L-S Mining Company is planning to open a new strip mine in western Pennsylvania. The net investment required to open the mine is $10 million. Net cash flows are expected to be +20 million at the end of year 1 and +5 million at the end of year 2. At the end of year 3, L-S will have a net ahs outflow of $17 million to cover the cost of closing the mine and reclaiming the land.

1. calculate the net preent value of the strip mine if the cost of capital is 5, 10, 15, 30, 71, and 80 percent.

2. what is unique about this project?

3. should the project be accepted if L-S's cost of capital is 10 percent? 20 percent?

Explanation / Answer

a.

Years

5%

10%

15%

20%

30%

71%

80%

1

$20,000,000.00

$19,047,619.05

$18,181,818.18

$17,391,304.35

$16,666,666.67

$15,384,615.38

$11,695,906.43

$11,111,111.11

2

$5,000,000.00

$4,535,147.39

$4,132,231.40

$3,780,718.34

$3,472,222.22

$2,958,579.88

$1,709,927.84

$1,543,209.88

3

($17,000,000.00)

($14,685,239.18)

($12,772,351.62)

($11,177,775.95)

($9,837,962.96)

($7,737,824.31)

($3,399,856.53)

($2,914,951.99)

$8,897,527.26

$9,541,697.97

$9,994,246.73

$10,300,925.93

$10,605,370.96

$10,005,977.75

$9,739,369.00

NPV

($1,102,472.74)

($458,302.03)

($5,753.27)

$300,925.93

$605,370.96

$5,977.75

($260,631.00)

b. As the cost of capital increases @ 71% the NPV is positive after while decling.

c. Project is selected @20% because of positive and greater NPV as compared to 10%.

Years

5%

10%

15%

20%

30%

71%

80%

1

$20,000,000.00

$19,047,619.05

$18,181,818.18

$17,391,304.35

$16,666,666.67

$15,384,615.38

$11,695,906.43

$11,111,111.11

2

$5,000,000.00

$4,535,147.39

$4,132,231.40

$3,780,718.34

$3,472,222.22

$2,958,579.88

$1,709,927.84

$1,543,209.88

3

($17,000,000.00)

($14,685,239.18)

($12,772,351.62)

($11,177,775.95)

($9,837,962.96)

($7,737,824.31)

($3,399,856.53)

($2,914,951.99)

$8,897,527.26

$9,541,697.97

$9,994,246.73

$10,300,925.93

$10,605,370.96

$10,005,977.75

$9,739,369.00

NPV

($1,102,472.74)

($458,302.03)

($5,753.27)

$300,925.93

$605,370.96

$5,977.75

($260,631.00)

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