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 $3,700,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $475,000 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 $530,000 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 11 percent on such undertakings. Should the mine be opened?
	Yes No

Answer 1

	The internal rate of return (IRR) is the rate of return for which the net present value is zero.
	Use the financial formulas function in excel to get the IRR.
	cash inflow in year 11	1025489
	cash outflow in year 11	530000
	Net cash inflow in year 11	495489
	Year	0	1	2	3	4	5	6	7	8	9	10	11
	cash flow	-3700000	475000	513000	554040	598363.2	646232.3	697930.8	753765.3	814066.5	879191.8	949527.2	495489
	IRR	12.35%
a)	The IRR for the gold mine is 12.35%.
b)	Since the required rate of return (11%) is less than IRR (12.35%), the Utah
	mining corporation should open the mine.
	Yes.
	The IRR is the rate of return for which the net present value (NPV) is zero.
	An IRR of 12.36% implies that the net present value will be positive
	when the required rate of return (11%) is less than the IRR. A project with a positive NPV should be undertaken.