12) The L-S Mining Company is planning to open a new strip mine in western Penns
ID: 2670419 • Letter: 1
Question
12) The L-S Mining Company is planning to open a new strip mine in western Pennsylvania. The net investment required to open the mind is $10 million. Net cash flows are expedited 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 net cash outflow of $17 million to cover the cost of closing the mine and reclaiming the land.A) Calculate the net present value of the strip mine if the cost of capital 5,10,15,30,71 and 80 percent.
B) What is unique about this project?
C) Should the project be accepted if L-S’s cost of capital is 10 percent? 20 percent
Explanation / Answer
NPV = NPV(Rate,CFs) + CF0 We Have CF0 = -10M, CF1 = 20M, CF2 = 5, CF3 = -17M A. Rate 5%, NPV=NPV(5%,20,5,-17) - 10 = $(1.10) Rate 10%, NPV =NPV(10%,20,5,-17) - 10 = $(0.46) Rate 15%, NPV =NPV(15%,20,5,-17) - 10 = $(0.01) Rate 30% NPV=NPV(30%,20,5,-17) - 10 = $0.61 Rate 71%, NPV =NPV(71%,20,5,-17) - 10 = $0.01 Rate 80%, NPV =NPV(5%,20,5,-17) - 10 = $(0.26) Rate 20%, NPV =NPV(5%,20,5,-17) - 10 = $0.30 B. Due to Time value of Money, as the Cost of capital Increases, the NPV based on Cash flows improves to a certain point beyond which it reduces. This is due to large & unequal CFs. C. DUe to a short project life & high Cash outflw in Y3, even though NPV is positive, it is avisable to look for alternate project of a longer lifecycle.
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