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CTC Mining Corporation - NPV & IRR Analysis

After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to mine the deposit. The most cost-effective method of mining gold is sulfuric extraction, a process that results in environmental damage. To go ahead with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for it's installation. The gold mined will net the firm an estimated $350,000 each year over the 5 year life of the vein. CTC's cost of capital is 14 percent. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

a. What are the NPV and IRR of this project?
b. Should this project be undertaken, ignoring environmental concerns?
c. How should environmental effects be considered when evaluating this, or any other project? How might these effects change your decision in part B?

Solution Preview

After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to mine the deposit. The most cost-effective method of mining gold is sulfuric extraction, a process that results in environmental damage. To go ahead with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for it's installation. The gold mined will net the firm an estimated $350,000 each year over the 5 year life of the vein. CTC's cost of capital is 14 percent. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

a. What are the NPV and IRR of this project?

NPV

Since the cash flows ...

Solution Summary

The solution evaluates a capital budgeting decision by calculating NPV and IRR.

$2.19