7-16.You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried verydeep, so the mine will require an initial investment of $250 million. Once this investment is made, themine is expected to produce revenues of $30 million per year for the next 20 years. It will cost $10million per year to operate the mine. After 20 years, the gold will be depleted. The mine must then bestabilized on an ongoing basis, which will cost $5 million per year in perpetuity. Calculate the IRR ofthis investment. (Hint: Plot the NPV as a function of the discount rate.)
7-18.You are considering constructing a new plant in a remote wilderness area to process the ore from aplanned mining operation. You anticipate that the plant will take a year to build and cost $100million upfront. Once built, it will generate cash flows of $15 million at the end of every year over thelife of the plant. The plant will be useless 20 years after its completion once the mine runs out of ore.At that point you expect to pay $200 million to shut the plant down and restore the area to its pristinestate. Using a cost of capital of 12%,a.WhatistheNPVoftheproject?b.IsuingtheIRRrulereliabfothispoject?Explain.c.WhatrethIR’softhisproject?Timeline:012321Cash Flow–100151515 + –200 .
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- Fall '13
- Net Present Value, IRR rule