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 $905,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $165,000 at the end of the first year, and the cash inflows are projected to grow at 3 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $120,000 at the end of year 11. (a) What is the IRR for the gold mine? (Round your answer to 2 decimal places. (e.g., 32.16)) (b) The Utah Mining Corporation requires a 15 percent return on such undertakings. Should the mine be opened? Yes or No?

Answer 1

a). IRR = 15.93%

b). At a required rate of return of 15%, the mine project has a positive NPV of $35,100.74 so Utah Mining Corporation can open the mine.

Initial investment	9,05,000
Life of mine	11
Year 1 cash inflow	1,65,000
Y-o-Y cash inflow increase	3%
Abandonment cost	1,20,000
Required rate of return	15%

Formula			1/(1+d)^n	(Cash flow*Discount factor)
	Year (n)	Cash flows	Discount Factor @15%	Discounte cash flow @15%
Initial investment	0	-9,05,000.00	1.0000	-9,05,000.00
Cash inflow	1	1,65,000.00	0.8696	1,43,478.26
Cash inflow increasing @ 3%	2	1,69,950.00	0.7561	1,28,506.62
	3	1,75,048.50	0.6575	1,15,097.23
	4	1,80,299.96	0.5718	1,03,087.08
	5	1,85,708.95	0.4972	92,330.17
	6	1,91,280.22	0.4323	82,695.72
	7	1,97,018.63	0.3759	74,066.60
	8	2,02,929.19	0.3269	66,337.91
	9	2,09,017.06	0.2843	59,415.69
	10	2,15,287.58	0.2472	53,215.80
Cash inflow + abandonment cost	11	1,01,746.20	0.2149	21,869.66
	IRR	15.93%	NPV	35,100.74