Question
In: Finance
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 $ 96 million upfront. Once built, it will generate cash flows of $ 16 million at the end of every year over the life of the plant. The plant will be useless 20 years after its completion once the mine runs out of ore. At that point you expect to pay $ 224 million to shut the plant down and restore the area to its pristine state. Using a cost of capital of 11 %: a. What is the NPV of the project? b. Is using the IRR rule reliable for this project? Explain. c. What are the IRRs of this project?
Solutions
Expert Solution
Answer:
(a) NPV of the project = -$6,243,554.33 or ($6,243,554.33)
(b) Yes, IRR rule is reliable
(c) IRR = 9.36%
Working:
Given that:
The plant will take a year to build and cost $ 96 million upfront. Once built, it will generate cash flows of $ 16 million at the end of every year
Let us assume:
The start time of building the plant of end of year 0:
Hence:
Year 0 Initial investment = -$96,000,000
Year 1: End of year 1 the project will be completed. So there is no cash flow at the end year 1
Year 2 to Year 21: Cash inflow of $16,000,000 each year
Year 21: Cash outflow = $224,000,000
We calculate below NPV and IRR using excel formulas:
Above excel with 'show formula' is as follows:
jeff jeffy answered 1 year agoRelated Solutions
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