The L-S Mining Company is planning to open a new strip mine in western Pennsylva
ID: 2719341 • Letter: T
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 cash outflow of $17 million to cover the cost of closing the mine and reclaiming the land. Calculate the net present value of the strip mine if the cost of capital is 5, 10, 15, 30, 71, and 80 percent. What is unique about this project? Should the project be accepted if L-S's cost of capital is 10 percent? 20 percent?Explanation / Answer
Actual result may vary to given answer due to difference in discount factor digits used . Used 4 digit factor for accuracy L-S Mining a. NPV Details NPV Details At cost of capital 5% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @5% 1 0.9524 0.9070 0.8638 PV of Cash Flows (10,000,000) 19,047,619 4,535,147 (14,685,239) NPV $ (1,102,473) NPV Details At cost of capital 10% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @10% 1 0.9091 0.8264 0.7513 PV of Cash Flows (10,000,000) 18,181,818 4,132,231 (12,772,352) NPV $ (458,302) NPV Details At cost of capital 15% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @15% 1 0.8696 0.7561 0.6575 PV of Cash Flows (10,000,000) 17,391,304 3,780,718 (11,177,776) NPV $ (5,753) NPV Details At cost of capital 20% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @20% 1 0.8333 0.6944 0.5787 PV of Cash Flows (10,000,000) 16,666,667 3,472,222 (9,837,963) NPV $ 300,926 NPV Details At cost of capital 30% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @30% 1 0.7692 0.5917 0.4552 PV of Cash Flows (10,000,000) 15,384,615 2,958,580 (7,737,824) NPV $ 605,371 NPV Details At cost of capital 71% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @71% 1 0.5848 0.3420 0.2000 PV of Cash Flows (10,000,000) 11,695,906 1,709,928 (3,399,857) NPV $ 5,978 NPV Details At cost of capital 80% Details Year 0 Year 1 Year 2 Year 3 Net Investment (10,000,000) Cash Flow 20,000,000 5,000,000 (17,000,000) Discount Factor @80% 1 0.5556 0.3086 0.1715 PV of Cash Flows (10,000,000) 11,111,111 1,543,210 (2,914,952) NPV $ (260,631) b. Unique about the project is that due to the project end cash outflow, the NPV increases with increase of cost of capital upto around 70%, above which rate again the NPV comes down as the discount of positive cash flows in initial years get devalued.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.