Question

Consolidated Mining Company considering opening a new surface coal mine outside of Davis, West Virginia. The mine is projected to generate cash flow of $203,526,188 per year for 8 years, followed by $126,487,265 per year for 8 years, after this period, the mine will be shut down. The cost for closing the mine and reclaiming the land will be $11,650,183 per year for 3 years. All cash flows will occur at the end of the year. If the cost of the new mine is $579,918,462, and the company's WACC is 13.4%, what is the net present value of the project? State your answer to the nearest whole dollar.

Answer 1

The following is the calculation for computation of NPV :-

Year	Cash Flow	PV Factor (13.4%) {1/(1+r)^n}	Present Value (Cash Flow * PV Factor)
0	(579,918,462)	1	(579,918,462)
1	203,526,188	0.881834215	179,476,356
2	203,526,188	0.777631583	158,268,392
3	203,526,188	0.685742137	139,566,483
4	203,526,188	0.604710879	123,074,500
5	203,526,188	0.533254743	108,531,305
6	203,526,188	0.470242278	95,706,618
7	203,526,188	0.41467573	84,397,371
8	203,526,188	0.365675247	74,424,489
9	126,487,265	0.322464945	40,787,709
10	126,487,265	0.284360621	35,967,997
11	126,487,265	0.250758925	31,717,811
12	126,487,265	0.2211278	27,969,851
13	126,487,265	0.19499806	24,664,771
14	126,487,265	0.171955961	21,750,239
15	126,487,265	0.15163665	19,180,105
16	126,487,265	0.133718386	16,913,673
17	(11,650,183)	0.117917448	(1,373,760)
18	(11,650,183)	0.10398364	(1,211,428)
19	(11,650,183)	0.091696332	(1,068,279)
Net Present Value	598,825,741

The Net Present Value of the Project comes to $598,825,741. As the NPV is positive with WACC of 13.4%, we should accept the project.