Tangshan Mining Company is considering investing in a new mining project. The fi

Question

Tangshan Mining Company is considering investing in a new mining project. The firm's cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $2,500,000 in year 1, $2,300,000 in year 2, $2,200,000 in year 3, and ($1,300,000) in year 4.

1) Calculate the project's NPV

2) Calculate the project's IRR

3) Should the firm make the investment

Please include the steps to the solutions.

Explanation / Answer

1. NPV= -5000000+2500000/1.12+2300000/1.12^2+2200000/(1.12)^3-1300000/(1.12)^4 =

2. IRR = (-5000000,4 year,12%)=9.11%

Yes, as NPV is positive the firm should make the investment..

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