Question

   Tangshan Mining Company is considering investing in a new mining project. The firm’s cost of capital is 12 percent and the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?

1. Maximum acceptable payback period of this project is 3 years. Calculate the payback period for this project.

2. Calculate the project’s NPV.

3. Calculate the project’s IRR. (Hint: You can calculate the IRR within the range of 5% and 10%)

Answer 1

NO, firm should not make investment because

a) Payback period is more than 3years

b) Npv is negative which means we not even get our initial investment

c) IRR is lower than the cost of capital 12%

Here is the IRR calculation (5.90%). There is slight difference from Excel (5.83%) because of rounding off decimals