Question

Suppose Appin coal mine values their coal extraction benefits as: Amount $18,000(YEAR 1) $23,000(YEAR 2) $27,000(YEAR...

Suppose Appin coal mine values their coal extraction benefits as:

Amount $18,000(YEAR 1)

$23,000(YEAR 2)

$27,000(YEAR 3)

$30,000 (YEAR 4)

$32,000 (YEAR 5)

a. Find the net present value of their extraction benefit when the discount rate is 12%. b. Now suppose the discount rate changes to 2%, find the new net present value and explain what Appin coal mine will do as a result of this change and why.

Homework Answers

Answer #1

a)

Expected cash flow in year1=CF1=$18000

Expected cash flow in year2=CF2=$23000

Expected cash flow in year3=CF3=$27000

Expected cash flow in year4=CF4=$30000

Expected cash flow in year5=CF5=$32000

Rate of interest=i=12%

Present value of coal extraction=CF1/(1+i)^1+CF2/(1+i)^2+CF3/(1+i)^3+CF4/(1+i)^4+CF5/(1+i)^5

Present value of coal extraction =18000/(1+0.12)^1+23000/(1+0.12)^2+27000/(1+0.12)^3+30000/(1+0.12)^4+32000/(1+0.12)^5

=$90848.16

b)

Rate of interest=i=2%

Present value of coal extraction=CF1/(1+i)^1+CF2/(1+i)^2+CF3/(1+i)^3+CF4/(1+i)^4+CF5/(1+i)^5

Present value of coal extraction =18000/(1+0.02)^1+23000/(1+0.02)^2+27000/(1+0.02)^3+30000/(1+0.02)^4+32000/(1+0.02)^5

=$121895.39

Present worth of expected coal extraction has increased. Appin coal company may offer extraction rights as higher price.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose Appin coal mine values their coal extraction benefits as: Amount $18,000(YEAR 1)   $23,000 (YEAR 2)...
Suppose Appin coal mine values their coal extraction benefits as: Amount $18,000(YEAR 1)   $23,000 (YEAR 2) $27,000 (YEAR 3) $30,000 (YEAR 4) $32,000 (YEAR 5) a. Find the net present value of their extraction benefit when the discount rate is 12%. b. Now suppose the discount rate changes to 2%, find the new net present value and explain what Appin coal mine will do as a result of this change and why.
Please answer question 2 1. The initial cost of constructing a permanent dam (i.e., a dam...
Please answer question 2 1. The initial cost of constructing a permanent dam (i.e., a dam that is expected to last forever) is $830 million. The annual net benefits will depend on the amount of rainfall: $36 million in a “dry” year, $58 million in a “wet” year, and $104 million in a “flood” year. Meteorological records indicate that over the last 100 years there have been 86 “dry” years, 12 “wet” years, and 2 “flood” years. Assume the annual...
Consider a highway project with the following costs and benefits. This representation of costs and benefits...
Consider a highway project with the following costs and benefits. This representation of costs and benefits assumes the costs occur immediately and the benefits occur at the end of year 1, end of year 2 and the end of year 3. Year 0 1 2 3 Costs $470,000 Benefits $275,000 $295,000 $315,000 (a) Calculate the net present value of the project. Assume a discount rate of 4%. (b) Now suppose all the benefits occur at the start of each period....
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually....
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually. How much will you have after 35 years? 2. A risk-free bond will pay you $1,000 in 1 year. The annual discount rate is i= 3.69% compounded annually. What is the bond's present value? 3. A risk-free bond will pay you $1,000 in 2 years and nothing in between. The annual discount rate is i= 9.5% compounded annually. What is the bond's present value?
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually....
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually. How much will you have after 35 years? 2. A risk-free bond will pay you $1,000 in 1 year. The annual discount rate is i= 3.69% compounded annually. What is the bond's present value? 3. A risk-free bond will pay you $1,000 in 2 years and nothing in between. The annual discount rate is i= 9.5% compounded annually. What is the bond's present value?
Net Present Value Problem Discount rate 12% Project 1 Year 1 Year 2 Year 3 Year...
Net Present Value Problem Discount rate 12% Project 1 Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL Costs 220,000 35,000 35,000 25,000 20,000 ? Discount factor ? ? ? ? ? Discounted costs ? ? ? ? ? ? Benefits 0 80,000 80,000 65,000 60,000 ? Discount factor ? ? ? ? ? ? Discount benefits ? ? ? ? ? ? Discounted benefits – Discounted costs (NPV) ? ? ? ? ? ? ROI = ???...
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually....
1. Suppose you save $18,000 per year at an interest rate of i= 5.21% compounded annually. How much will you have after 35 years? 2. A risk-free bond will pay you $1,000 in 1 year. The annual discount rate is i= 3.69% compounded annually. What is the bond's present value?
Assume that the project is expected to return monetary benefits of $20,000 the first year, and...
Assume that the project is expected to return monetary benefits of $20,000 the first year, and increasing benefits of $5,000 until the end of project life (year 1 = $20,000, year 2 = $25,000, year 3 = $30,000). The project also has one-time costs of $30,000, and fixed recurring costs of $10,000 until the end of project life. The project has a discount rate of 8% and a three-year time horizon. Calculate overall net present value (NPV) of the project...
A project has the following cash flow. Year Costs Benefits 0 $10,000 0 1 $1,000 $5,000...
A project has the following cash flow. Year Costs Benefits 0 $10,000 0 1 $1,000 $5,000 2 $1,000 $5,000 3 $2,000 $6,000 4 $2,0000 $3,000 Assuming a discount rate of 10%, estimate the following: a)Net Present Value (NPV) b)Discounted Benefit-Cost Ratio c)Net discounted Benefit-Cost Ratio d)Is the project feasible? Explain your answer
Net Present Value Calculation Initial Investment Discount Rate Net Benefit Year 1 Net Benefit Year 2...
Net Present Value Calculation Initial Investment Discount Rate Net Benefit Year 1 Net Benefit Year 2 New Benefit Year 3 Present Value Is this a worthwhile investment? 100,000 .06 50,000 50,000 50,000 100,000 .12 50,000 50,000 50,000 100.000 .24 50,000 50,000 50,000 200,000 .06 80,000 80,000 80,000 200,000 .36 100,000 100,000 100,000 500,000 .36 200,000 350,000 500,000 500,000 .36 500,00 350,000 200,000
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT