You own a coal mining company and are considering opening a new mine. The mine w

Question

You own a coal mining company and are considering opening a new mine. The mine will cost $118.3 million to open. If this money is spent immediately, the mine will generate $21.9 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 $1.6 million per year in perpetuity. Question: The NPV using the cost capital of 8.3% is $ ___ Millions (round to three decimal places)

Explanation / Answer

Year    Cash flows PVF @ 8.3 %    PV 0 -118.300 1 -118.300 1 21.900 0.923 20.222 2 21.900 0.853 18.672 3 21.900 0.787 17.241 4 21.900 0.727 15.920 5 21.900 0.671 14.699 6 21.900 0.620 13.573 7 21.900 0.572 12.533 8 21.900 0.528 11.572 9 21.900 0.488 10.685 10 21.900 0.451 9.866 10 19.280 0.451 8.686 NPV 35.369 PV at year 10 for perpetual cost after year10 = Cashflow/discount rate 1.60/8.3% 19.28

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