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

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Asked Nov 15, 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

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Expert Answer

Step 1

With the given values on the initial cash outflows and the future cash inflows we can determine the values of NPV and IRR using the steps below:

Step 2
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Initial cash flow-Expense on equipment Installation charges -S900000+$165000=$1065000

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Step 3
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The cash flows are: Year 0: -$1065000 Year 1:$350,000 Year 2:$350,000 Year 3:$350,000 Year 4:$350,000 Year 5:$350,000

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