Question

Gaurav Coal Mining, Inc. is considering opening a strip mine, the cost of which is $17.4 million. Cash flows will be $110.8 million, all coming at the end of one year. The land must be returned to its natural state at a cost of $100 million, payable after two years. Compute the IRR for this project. Should the project be accepted if required rate of return is 8 percent? Should the project be accepted if the required rate of return is 14 percent? Explain your reasoning. At what costs of capital, the project is acceptable. Plot the graph of NPV for this project.

Answer 1

		Present Value of Cash Flow =(Cash Flow)/((1+i)^N)											5.3
		i=Cost of Capital =8%=0.08											5.3
		N= Year of Cash Flow
		EVALUATION OF INTERNAL RATE OF RETURN
			N	CF	CF/(1.08^N)	CF/(1.05^N)	CF/(1.08^N)	CF/(1.09^N)	CF/(1.12^N)	CF/(1.14^N)	CF/(1.20^N)	CF/(1.25^N)	CF/(1.3^N)	CF/(5.3^N)
			Year	Cash Flow($ Million)	Present Value at 8%	Present Value at 5%	Present Value at 8%	Present Value at 9%	Present Value at 12%	Present Value at 14%	Present Value at 20%	Present Value at 25%	Present Value at 30%	Present Value at 430%
			0	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)	($17.4)
			1	$110.8	$102.6	$105.52	$102.6	$101.7	$98.93	$97.19	$92.33	$88.64	$85.23	$20.91
			2	($100)	($85.7)	($90.70)	($85.7)	($84.2)	($79.72)	($76.95)	($69.44)	($64.00)	($59.17)	($3.56)
	IRR	Internal Rate of Return(Using IRR function of excel)	8.86%	SUM($ million)	($0.5)	($2.6)	($0.5)	$0.1	$1.8	$2.8	$5.5	$7.2	$8.7	($0.1)
		Project should not be accepted if required return is 8%
		NPV of the project will be negative
		Project should be accepted if required return is 14%
		NPV of the project will be POSITIVE
		Project is acceptable at cost of capital above 9%
		NPV Profile
		Discount Rate	5%	8%	9%	12%	14%	20%	25%	30%	430%
		NPV	($2.6)	($0.5)	$0.1	$1.8	$2.8	$5.5	$7.2	$8.7	($0.1)