Question

You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flows of $15 million at the end of every year over the life 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 pristine state. Using a cost of capital of 12%,
what is the NPV of the project? Is using the IRR rule reliable for the project? What are the IRR's of the project?

Answer 1

Answer:

NPV = $-8,691,698.65

NO

IRR = 0%

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR and IRR can be calculated with a financial calculator  

Cash flow in year 0 = $-100 million

Cash flow each year from year 1 to 19  = $15 million

Cash flow in year 20 = $15 million - $200 million = $-185 million

I = 12%

NPV = $-8,691,698.65

IRR = 0%

IRR is not reliable for a project with a cash flow with irregular cash flows.

Cash flow is irregular when there is a more than cash outflow

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.