Question

After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that could result in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its 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 13%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.

1. What is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest dollar. Use a minus sign to enter negative value, if any.

   $  

   What is the project's IRR? Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. Should this project be undertaken if environmental impacts were not a consideration?

   -Select-YesNoItem 3

3. How should environmental effects be considered when evaluating this, or any other, project?
   I. Environmental effects should be treated as sunk costs.
   II. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).
   III. Environmental effects should be ignored since they would have no effect on the project's profitability.
   -Select-IIIIIIItem 4

Answer 1

a. Computation NPV
Year	Amount	PVF @13%	PV of cash flows
Year 1	$        350,000	0.8850	$              309,735
Year 2	$        350,000	0.7831	$              274,101
Year 3	$        350,000	0.6931	$              242,568
Year 4	$        350,000	0.6133	$              214,662
Year 5	$        350,000	0.5428	$              189,966
		Total Inflows	$           1,231,031
Initial Outflows	=$900,000+$165,000 = $1,065,000
NPV	=Inflows - Outflows
	=$1,231,031- $1,065,000=	$              166,031
Coputation of IRR
NPV at 13% Is $166,031
NPV at 18%
Year	Amount	PVF @20%	PV of cash flows
Year 1	$        350,000	0.8333	$              291,667
Year 2	$        350,000	0.6944	$              243,056
Year 3	$        350,000	0.5787	$              202,546
Year 4	$        350,000	0.4823	$              168,789
Year 5	$        350,000	0.4019	$              140,657
		Total Inflows	$           1,046,714
NPV	=Inflows - Outflows
	=$1,046,031- $1,065,000=	$              (18,286)
	= Lower Rate + (Lower NPV / ( higher rate NPV + Lower rate NPV)*(higher rate - lower rate)
	=13+(166,031/(166031+18286)*(20-13))
	19.31%

b. Should this project be undertaken if environmental impacts were not a consideration?

Yes, excluding the environmental impacts project is good to be undertaken

1. as the NPV is positive at the rate of 13%

2. and also the cost of capital is lesser than the IRR.

Answer to question c.

II. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible).

That is beacuse if there are any environmental issues are arising by undertaking this project CTC mining Coproation may end up paying lot of penalities or the costs to bring the land to preevious states. Therefore entity should evaluvate the cost that may incurred for the environmental related issues. And should consider them as ourflows to arrive the NPV should bring to the preasent value and reduce from the inflows.