A new diamond deposit has been found in northern Alberta. Your researchers have determined that it will cost $2.5 million to purchase the land and prepare it for mining. At the beginning of both the second and third years, another $1 million investment will be required to establish the mining operations. Starting at the end of the second year, the deposit is expected to earn net profits of $3 million, which will be sustained for three years before the deposit is depleted. If the cost of capital is 16%, should your company pursue this venture? Provide calculations to support your decision

A new diamond deposit has been found in northern Alberta. Your researchers have determined that it will cost $2.5 million to purchase the land and prepare it for mining. At the beginning of both the second and third years, another $1 million investment will be required to establish the mining operations. Starting at the end of the second year, the deposit is expected to earn net profits of $3 million, which will be sustained for three years before the deposit is depleted. If the cost of capital is 16%, should your company pursue this venture? Provide calculations to support your decision

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 12P: After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide...

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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 mined gold will net the firm an estimated 350,000 each year for the 5-year life of the vein. CTCs 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 projects 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?
A proposed gold mine would require the investment of $2.65 million at the beginning of the first year and a further investment of $4.6 million at the end of the first year. Mining operations are expected to yield annual year-end profits of $2 million starting in year three. The mine will sustain eight years of mining operations, once it reaches profit. At the end of the last year of operations, the mining company would also have to spend $2 million on environmental restoration. Would the project provide the mining company with a rate of return exceeding its 12% cost of capital? If the rate of return was 8%, how much more/less would the NPV be? Multiple Choice о O Yes, $769,255 More $1,498,732 No, $519,255 Less $1,498,732 Yes, $519,255 Less $1,498,732 Yes, $519,255 More $1,923,732 Yes, $519,255 More $1,498,732
A mine would require an investment of $5 million at the beginning of the first year and a further investment of $5 million at the end of the first year. Mining operations are expected to yield annual year-end profits of $1 million starting in Year 2. The ore body will sustain 10 years of mining operations. At the end of the last year of operations, the mining company would also have to spend $1 million on environmental restoration. Would the project provide the mining company with a rate of return exceeding its 10% cost of capital?
Chî Mining Corporative is set to open a gold mine in Mansa. According to the evaluations made this far, the mine will cost 900,000 to open and will have an economic life of 11 years. It will generate a cash inflow of 175,000 at the end of the first year, and the cash inflows are projected to grow at 8% per year for the next 10 years. It is projected that the mine will be abandoned in the 11th year. Abandonment costs are expected to be 125,000 at the end of year 11. The required return for the investors is 10%. Using the internal rate of return (IRR), Should the mine be opened?
Clapton Corporation is considering an investment in new equipment costing $750,000. The equipment will be depreciated on a straight-line basis over an eight-year life and is expected to have a salvage value of $80,000. The equipment is expected to generate net cash flows of $120,000 for each of the first four years and $80,000 for each of the last four years. What is the accounting rate of return associated with the equipment investment?
Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.The payback period for Rearden's mining operation is closest to:
You have been given the following information on a project. It has a 5-year lifetime The initial investment in the project will be $25 million, and the investment will be depreciated straight line, down to a salvage value of $10 million at the end of the fifth year. The revenues are expected to be $20 million next year and to grow 10% a year after that for the remaining 4 years. The cost of goods sold, excluding depreciation, is expected to be 50% of revenues. The tax rate is 40%. The project will require a $1 million increase in working capital. If the cost of capital is 12% what is the NPV and IRR? (Ans. $10,413,439.23 and 24.56%)
Your company is planning to open a new gold mine which will cost $3million to build with the expenditure occurring at the end of year three years from today. The mine will bring year end after tax cash inflow of$2million at the end of two succeeding years. And then it will cost $0.5million to close down the mine at the end of third year of operation what is project IRR
Striped Potato is evaluating a project that would require the purchase of a piece of equipment for $365,000 today. During year 1, the project is expected to have relevant revenue of $216,000, relevant costs of $57,000, and relevant depreciation of $84,000. Striped Potato would need to borrow $365,000 today to pay for the equipment and would need to make an interest payment of $14,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $44,000. What is the tax rate expected to be in year 1?
The L-S Mining Company is planning to open a new strip mine in western Pennsylvania. The net investment required to open the mine is $13 million. Net cash flows are expected to be +$22 million at the end of year 1 and +$7 million at the end of year 2. At the end of year 3, L-S will have a net cash outflow of $17 million to cover the cost of closing the mine and reclaiming the land. Use Table II to answer the questions. Calculate the net present value of the strip mine if the cost of capital is 1, 6, 9, 30, 42, and 75 percent. Enter your answers in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answers to two decimal places. k NPV 1% $ million 6% $ million 9% $ million 30% $ million 42% $ million 75% $ million What is unique about this project? The NPV is negative at discount rates between % and %, positive from % to % and negative beyond %. Should the project be accepted if L-S's cost of capital…
Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. The number of potential IRRs that exist for Rearden's mining operation is equal to: O A. 2 OB. 1 O C. 12 O D. 0 C
An investment of $20,000 for a new condenser is being considered. Estimated salvage value of the condenser is $5,000 at the end of an estimated life of 6 years. Annual income each year for the 6 years is $8,500. Annual operating expenses are $2,300. Assume money is worth 15% compounded annually. Determine the external rate of return and whether or not the condenser should be purchased.