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.] without using excel

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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.

What is the NPV, and IRR of the project? [Note: you are supposed to show every step of your calculation and interpret the result.] without using excel

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Expert Answer

Step 1

Calculation of Net Present Value:

The net present value is $136,578.34.

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Cash Flow (1+r) Cash Flow Cash Flow NPV-Cash Flowo + (1+r (1+r) $350,000 (1+14%) $350,000 $350,000 ($900, 000 + $165,000)+ (1+14%) (1+14%) $350,000 $350,000 (1+14% $350,000 (1+14%) $350,000 $350, 000 -$1,065,000+ 1.4815 1.14 1.2996 $350,000 $350,000 1.6890 1.9254 -$1,065,000 + $307,017.54 + $269,313.63 + $236, 240.03 + $207, 228.10 + $ 1 81,779.03 $136,578.34

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Step 2

Calculation of Internal Rate of Return:

By solving for “r” using trial and error method or by excel the IRR is calculated as 19.22%.

The internal rat...

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Cash Flow Cash Flow Cash Flow NPV -Cash Flow (1+r) (1+r) |(1+r) $350,000 $350,000 $350,000 ($900, 000 + $165,000)+| (1+r) (1+ry (1+r 0 = $350,000 $350,000 (1+r) (1+r) 0.19217 or19.22% r=

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