You own a coal mining company and are considering opening a new mine. The mine w
ID: 2737892 • Letter: Y
Question
You own a coal mining company and are considering opening a new mine. The mine will cost $117.5 million to open. If this money is spent immediately, the mine will generate $19.6 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.8 million per year in perpetuity. Question: The NPV using the cost capital of 8.1% is $ ___ Millions (round to three decimal places)
Explanation / Answer
Details Cost of cleaning & maintenance per year in perpetuity = 1,800,000 Cost of Capital = 8.1% PV of cost of cleaning in Year 11=1800000/8.1%= 22,222,222 NPV Calculation Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Cost of Mine (117,500,000) Cash Inflow 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 PV of cleaning cost in perpetuity at Year 11 (22,222,222) Net Cost (117,500,000) 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 19,600,000 (22,222,222) PV factor @8.1% 1 0.925 0.856 0.792 0.732 0.677 0.627 0.580 0.536 0.496 0.459 0.425 PV of Net Cash flows (117,500,000) 18,131,360 16,772,766 15,515,972 14,353,351 13,277,845 12,282,928 11,362,561 10,511,157 9,723,549 8,994,958 (9,434,195) NPV = $ 3,992,251.406 So The NPV of the project is = $ 3,992,251.41
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