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You are considering constructing a new plant in a remote wilderness area to process the ore...

You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $120 million upfront. Starting in t=1, it will generate cash flows of $19 million at the end of every year over the life of the plant. The plant will be useless 20 years later, once the mine runs out of ore. In t=21 you expect to pay another $120 million to shut the plant down and restore the area to its pristine state. Using a cost of capital of 8,9%, a. What is the NPV of the project? b. Is using the IRR rule reliable for this project? Explain in 1-2 sentences.


Solutions

Expert Solution

Solution:-

To Find NPV of the Project-

IRR of the Project-

As project is accepted because NPV of the project is positive and seems to be profitable. NPV is higher the better. IRR of the project is higher than expected rate of return of the project. IRR is higher the better. It is advised to accept the project as seems to be profitable.

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jeff jeffy answered 1 year ago
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