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? [Note: you are supposed to show every step of your calculation and interpret the result.] 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? [Note: remember to use Harvard referencing to reference your sources]

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Asked Nov 11, 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? [Note: you are supposed to show every step of your calculation and interpret the result.] 
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? [Note: remember to use Harvard referencing to reference your sources] 

 

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Expert Answer

Step 1

a)

It is given that,

Cost of equipment is $900,000.

Installation cost is $165,000. So, the total cost will be $1,065,000.

Annual profit for next five years will be $350,000.

Cost of capital is 14%.

Step 2

Annuity factor can be used to calculate the present value of all future annual profits.

The net present value can be calculated with the help of below expression:

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Net present value = (Annual profit x Annuity factor)-Total initial cost 1-(1+) Annual profit x -Total initial cost

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Step 3

Substitute $350,000 for annual profit, 14% for i, 5 for n...

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Net present value (Annual profit x Annuity factor)-Total initial cost 1-(1+14%) =$350,000 x -$1, 065, 000 14% 0.48063 =$350, 000 x| $1, 065, 000 0.14 (S350,000x3.433)- $1065,000 =$1,201,578.34-$1,065,000 = $136, 578.34

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