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.a.What is the NPV, and IRR of the project?b.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?

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Asked Nov 17, 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.

a.What is the NPV, and IRR of the project?

b.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?

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Expert Answer

Step 1

a.

Calculation of NPV and IRR:

The NPV is $136,578.34 and the IRR is 19.22%.

Excel Spreadsheet:

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A В с D Cash Flows FVIF @ 14% PV of Cash Flows -$1,065,000 1 Year -$1,065,000 2 0 1.0000 3 1 $350,000 1.1400 $307,017.54 4 2 $350,000 1.2996 $269,313.63 5 3 $350,000 1.4815 $236,240.03 1.6890 $207,228.10 6 4 $350,000 $350,000 $181,779.03 7 5 1.9254 $136,578.34 8 Net Present Value Internal Rate of Return 19.22% 4A

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Step 2

Excel Workings:

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A В 1 Year FVIF @14% PV of Cash Flows Cash Flows (900000+165000)(1+14%)^A2 -B2/C2 350000 350000 350000 350000 | 350000 2 0 |=(1+14%)^A3 |B3/C3 =(1+14%)^A4| =B4/C4 (1+14%) A5B5/C5 (1+14% ) A6-B6/C6 (1+14% ) A7B7/C7 3 1 4 2 5 3 6 4 7 5 |-SUM(D2:D7) |=IRR(B2:B7) 8 Net Present Value Internal Rate of Return

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Step 3

b.

The environmental effects are as follows,

The significant fact here is that cash flow forecasts must incorporate changes for inflation to coordinate the necessary rate of return, which as of now factors in inflation. If the cash flows are not balanced for inflation, the managers are likely undervalui...

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