Question

The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,700,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $375,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $430,000 at the end of Year 11. a. What is the IRR for the gold mine? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. The Utah Mining Corporation requires a return of 10 percent on such undertakings. Should the mine be opened? Yes No

Answer 1

1: IRR = 14%

2: Yes, since NPV is positive

WORKINGS

Year	Cash flows
0	($2,700,000.00)
1	375000
2	405000
3	437400
4	472392
5	510183.36
6	550998.0288
7	595077.8711
8	642684.1008
9	694098.8289
10	749626.7352
11	379596.874
IRR	14.00%
NPV	$576,314.29