A mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north of Johannesburg. SA mining corporation will have to decide if they should set up a mine in the newly discovered location. They will be using the most cost effective, but environmentally damaging method of gold mining sulfuric acid extraction. To go ahead SA mining corporation must spend $900,000 on new mining equipment and pay $165,000 for its installation. The goldmine will make an annual profit contribution of $350,000 each year over the next five years of the extraction. SA’s cost of capital is 14% and assume that cash flows occur at the end of each year.What is the NPV, and IRR of the project? [Note: you are supposed to show every step of your calculation and interpret the result.]Critically discuss how environmental effects should be considered when evaluating these types of projects (impact investing), include in your discussion the challenges in quantifying these issues in finance decisions of business organizations? [Note: remember to use Harvard referencing to reference your sources]

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Asked Dec 7, 2019
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A mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north of Johannesburg. SA mining corporation will have to decide if they should set up a mine in the newly discovered location. They will be using the most cost effective, but environmentally damaging method of gold mining sulfuric acid extraction. To go ahead SA mining corporation must spend $900,000 on new mining equipment and pay $165,000 for its installation. The goldmine will make an annual profit contribution of $350,000 each year over the next five years of the extraction. SA’s cost of capital is 14% and assume that cash flows occur at the end of each year.

  1. What is the NPV, and IRR of the project? [Note: you are supposed to show every step of your calculation and interpret the result.]
  2. Critically discuss how environmental effects should be considered when evaluating these types of projects (impact investing), include in your discussion the challenges in quantifying these issues in finance decisions of business organizations? [Note: remember to use Harvard referencing to reference your sources]
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Expert Answer

Step 1

a) Cash outflow is the Cost of the equipment + installation cost

Cash outflow = $900000 + $165000

Cash outflow = $1065000

 

Cash inflow for Year 1 – 5 = $350000

Cost of capital = 14%

 

Step 2

Calculation for NPV is as below:

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A |PV of cash flows 1S -10,65,000.0000000000 Cash Flows |PV factor @14% 133 Year -10,65,000.00 3,50,000.00 3,50,000.00 3,50,000.00 134 0.877192982456140| S 0.769467528470299 S 0.674971516202016| S 0.592080277370190 S 0.519368664359816 S 3,07,017.5438596490 2,69,313.6349646050 2,36,240.0306707060 2,07,228.0970795660 135 2 S 3 S 4 S 136 137 3,50,000.00 138 5 S 1,81,779.0325259350 1,36,578.3391004610 3,50,000.00 NPV 139 140

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Step 3

Excel work...

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PV factor @14% =1/1.14^A134 =1/1.14^A135 =1/1.14^A136 =1/1.14^A137 =1/1.14^A138 =1/1.14^A139 PV of cash flows =B134*C134 =B135*C135 |=B136*C136 =B137*C137 =B138*C138 =B139*C139 |=SUM(D134:D139) Cash Flows |-1065000 350000 350000 350000 350000 350000 133 Year 134 0 135 1 136 2 137 3 138 4 139 5 NPV 140

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