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 of 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)Calculate the NPV,and the 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 Dec 1, 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 of 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)Calculate the NPV,and the 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

Net present value is the value of cash flows today that are expected to be earned in future.

Step 2

Given:

 

Initial cost =900,000

Installation cost = $165,000

Life = 5 years

Annual inflow = $350,000

Step 3

Calculations:

 

(a)

 

NPV and IRR are calculated usin...

fNPV(E11,ES:E10)
E12
A
D
E
3
Year
Cash flows
4
0
-1,065,000
5
350,000
350,000
350,000
350,000
6
2
7
3
8
4
9
5
350,000
10
14%
11
NPV S119,805.56
12
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fNPV(E11,ES:E10) E12 A D E 3 Year Cash flows 4 0 -1,065,000 5 350,000 350,000 350,000 350,000 6 2 7 3 8 4 9 5 350,000 10 14% 11 NPV S119,805.56 12

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