Problem 10-12 NPV and IRR Analysis After discovering a new gold vein in the Colo

Question

Problem 10-12
NPV and IRR Analysis

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 17%. 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

2) IRR

IRR = 17% + 2.45% i.e 19.45%

Particulars Year Cash Flows PVF @ 17% PV Initial cash outflow 0 -1065000 1 -1065000 Cash Inflow 1 350000               0.85 2,99,145.30 Cash Inflow 2 350000               0.73 2,55,679.74 Cash Inflow 3 350000               0.62 2,18,529.69 Cash Inflow 4 350000               0.53 1,86,777.52 Cash Inflow 5 350000               0.46 1,59,638.90 Net Present Value      54,771.16

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