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 $2,600,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $365,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $420,000 at the end of Year 11.

Answer 1

Internal Rate of Return (IRR) Calculation

Year	Initial Cost	Cash inflow with 8% annual growth rate	Abandonment costs	Net Cash Flow from gold mine
0	-$2,600,000			-$2,600,000
1		$365,000		$365,000
2		$394,200		$394,200
3		$425,736		$425,736
4		$459,795		$459,795
5		$496,578		$496,578
6		$536,305		$536,305
7		$579,209		$579,209
8		$625,546		$625,546
9		$675,590		$675,590
10		$729,637		$729,637
11		$788,008	-$420,000	$368,008
Internal Rate of Return (IRR)				14.23%

As the Internal rate of return of the project is 14.23% therefore the project is acceptable if required rate of return of the company is below 14.23% and it is not acceptable is required rate of return is more than the 14.23%.

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