Question

The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, "This is a golden opportunity." The mine will cost $3,400,000 to open and will have an economic life of 11 years. It will generate a cash inflow of $575,000 at the end of the first year, and the cash inflows are projected to grow at 8 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $123,000 at the end of year 11.
Required:
What is the IRR for the gold mine? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
IRR
%

Answer 1

Answer:

19.07%

Explanation:

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

IRR can be calculated with a financial calculator  

Cash flow in year 0 = $-3,400,000

Cash flow in year 1 = $575,000  

Cash flow in year 2 = $575,000 x 1.08  

Cash flow in year 3 =  $575,000 x 1.08^2

Cash flow in year 4 =  $575,000 x 1.08^3

Cash flow in year 5 =  $575,000 x 1.08^4

Cash flow in year 6 =  $575,000 x 1.08^5

Cash flow in year 7 =  $575,000 x 1.08^6

Cash flow in year 8 =  $575,000 x 1.08^7

Cash flow in year 9 =  $575,000 x 1.08^8

Cash flow in year 10 =  $575,000 x 1.08^9

Cash flow in year 11 =  ($575,000 x 1.08^10) - $123,000

IRR = 19.07%

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.