Concept explainers
a.
Adequate information:
Cost of gold mine=$3,400,000
Economic life = 11 years
Growth rate=8%
Abandonment cost at the end of Year 11= $450,000
To compute:
Introduction: IRR is defined as the rate at which the aggregate
b.
Adequate information:
Cost of gold mine=$3,400,000
Economic life = 11 years
Cash inflow at the end of Year 1=$575,000
Growth rate=8%
Abandonment cost at the end of Year 11= $450,000
To determine: Whether the project should be accepted if the required
Introduction: The project should be accepted or rejected by computing the NPV of the project. NPV is the net of the
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- Manzer Enterprises is considering two independent investments: A new automated materials handling system that costs 900,000 and will produce net cash inflows of 300,000 at the end of each year for the next four years. A computer-aided manufacturing system that costs 775,000 and will produce labor savings of 400,000 and 500,000 at the end of the first year and second year, respectively. Manzer has a cost of capital of 8 percent. Required: 1. Calculate the IRR for the first investment and determine if it is acceptable or not. 2. Calculate the IRR of the second investment and comment on its acceptability. Use 12 percent as the first guess. 3. What if the cash flows for the first investment are 250,000 instead of 300,000?arrow_forwardThe Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, "This is a golden opportunity." The mine will cost $4, 000, 000 to open and will have an economic life of 11 years. It will generate a cash inflow of $505,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abthe next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $560,000 at the end of Year 11. a. What is the IRR for the gold mine? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardD. The Yufi Mining Corporative is set to open a gold mine in Mansa. According to the evaluations made this far, the mine will cost K900,000 to open and will have an economic life of 11 years. It will generate a cash inflow of K175,000 at the end of the first year, and the cash inflows are projected to grow at 8% per year for the next 10 years. It is projected that the mine will be abandoned in the 11th year. Abandonment costs are expected to be K125,000 at the end of year 11. The required return for the investors is 10%. Using the internal rate of return (IRR), Should the mine be opened?arrow_forward
- The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, "This is a golden opportunity." The mine will cost $4,000,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $505,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $560,000 at the end of Year 11. What is the IRR for the gold mine? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR %arrow_forwardGiven a project with cash outlay today of $100,000. The project is expected to generate cash flows of $25,000 per year for 7 years, starting in year 3, as well as an additional $50,000 in the final year. Given a WACC of 6%, what is the IRR? A 7.24% B 13.24% C 13.59% D 11.57% E 21.28% You are given opportunity to purchase product for $42, 000. The product will have annual operating expenses of $4,000, and a salvage value of $20,000 at the end of its useful life of 6 years. Assuming a discount rate of 9.0%, what is the minimum acceptable revenue to justify taking this project? A 1.01% B $333 C $2704 D $767 E $10704arrow_forwardSnowflake Resorts is considering investing in a project that has a net investment of $240,000. This project will return positive net cash flows annually for the next 5 years of $80,000 per year. Snowflake Resorts requires a 12% return on all of its investments. The payback period of this investment is ________ years 5 3 4 2 The net present value of this project is $65,355 $48,384 $85,652 $57,635 The profitability index of this project is 2016 5924 7350 3852 When projects have scale differences, only the Net Present Value method will rank the projects correctly True False Fees paid to investment bankers and lawyers for issuing securities are called Component costs Issuance costs Security costs Licensing costs Purposes for considering a capital project may include which of the following Cost reductions Growth projects Government required projects All of the above When the weighted average cost of capital for a project is considered on an after tax…arrow_forward
- The Merriweather Printing Company is trying to decide on the merits of constructing a new publishing facility. The project is expected to provide a series of positive cash flows for each of the next four years. The estimated cash flows associated with this project are as follows: Year. Project cash flow 0 ? 1 $810,000 2 $390,000 3 $260,000 4 $460,000 If you know that the project has a regular payback of 2.4 years, what is the projects IRR?arrow_forward2. It is estimated that a copper mine will produce 10,000 tons of ore during the coming year. Production is expected to increase by 5% per year thereafter in each of the following six years. Profit per ton will be $14 for years one to seven. a. Draw a cash flow diagram for this copper mine operation from the company's viewpoint.arrow_forwardGeoSourcex is considering opening a new titanium mine. Once in operation, the mine is expected to produce positive net cash flows in perpetuity starting 3 years from now at $19.5 million per year but declining at a constant rate of 1.8% per year. The costs of getting the mine operational include an immediate payment of $110.0 million to purchase the land and acquire the mineral rights, plus other start -up costs of $10.0 million per year for three years starting in one year. If the project's cost of capital is 10.2% per year (compounded annually) what is the Net Present Value of this new mine?arrow_forward
- Mr Blight the owner of Blight Oil exploration firm is evaluating a new Oilwell in Calgary Alberta. The oil exploration engineer has just finished hisanalysis of the new Oil well. He has estimated that the Oil well will beproductive for eight years, after which the well become dry. The Oil well willcost $450 million for exploration. The expected cashflow each year from theOil well are shown below and Blight Oil exploration firm has a 12% requiredreturn on all its Oil well. year cash flow 0 -$450,000,000 1 63,000,000 2 85,000,000 3 120,000,000 4 145,000,000 5 175,000,000 6 120,000,000 7 95,000,000 8 75,000,000 9 -70,000,000 a) Determine the payback period, internal rate of return and net presentvalue. Based on your analysis should the company open the new Oilwell?b) Lets assume NPV is conceptually the best procedure for capitalbudgeting, why do you think that multiple measures are used inpractice?arrow_forwardA new diamond deposit has been found in northern Alberta. Your researchers have determined that it will cost $4.5 million to purchase the land and prepare it for mining. Starting at the end of the second year, the lode is expected to earn net profits of $3 million, which will be sustained for three years before the deposit is depleted. Calculate the IRR on the diamond mine. If the cost of capital is 21%, should the deposit be aquired?arrow_forwardEvelyn's Exotics and Aquatics Shoppe is considering investing $540,000 in a project. The project is expected to generate a cash inflow of $90,000 in the first year, $180,000 in the second year, $540,000 in the third year, $450,000 in the fourth year, and $0 in subsequent years. Calculate the project’s payback period in years. Round your answer to two decimal places in years. For example, if the payback period is 1 year and 6 months (1.5 years), enter “1.50”. If the payback period is 2 years and 3 months (2.25 years), enter “2.25”. If the payback period is 3 years and 4 months (3.3333 years), enter “3.33”.arrow_forward
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