EDU-522 Lecture 17: Installation Notes

Problem 10-12
NPV and IRR Analysis

After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that results in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year over the 5-year life of the vein. CTC's cost of capital is 13%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

What is the project's NPV? Round your answer to the nearest dollar.
$
What is the project's IRR? Round your answer to two decimal places.
%

Should this project be undertaken if environmental impacts were not a consideration?
-Select-YesNo

How should environmental effects be considered when evaluating this, or any other, project?
-Select-
I. Environmental effects should be treated as sunk costs.
II. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).
III. Environmental effects should be ignored since they would have no effect on the project's profitability.

After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation

must decide whether to go ahead and develop the deposit. The most cost-effective method of

mining gold is sulfuric acid extraction, a process that could result in environmental damage.

Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment

and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000

each year for the 5-year life of the vein. CTC’s cost of capital is 14%. For the purposes of this

problem, assume that the cash inflows occur at the end of the year.

a. What are the project’s NPV and IRR?

b. Should this project be undertaken if environmental impacts were not a consideration?

c. How should environmental effects be considered when evaluating this, or any other,

project? How might these concepts affect the decision in part b?