A mining company plans to mine a beach for rutile.To do so will cost $10 million up front and then produce cash flows of $3 million per year for five years.At the end of the sixth year the company will incur shut-down and clean-up costs of $2 million.If the cost of capital is 11%,then what is the NPV for this project?
A)-$99,212
B)$12,304
C)$18,409
D)$82,416
E)$111,389

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount all cash flows at the cost of capital of 11%.

Year 0: -$10 million (outflow)
Year 1-5: $3 million (inflow) / (1.11)^1-5 = $10.27 million
Year 6: -$2 million (outflow) / (1.11)^6 = -$1.03 million

NPV = (-$10 million) + $10.27 million - $1.03 million = $18.409 million

Therefore, the correct answer is C, which shows a positive NPV, indicating that the project is worth pursuing.

A Mining Company Plans to Mine a Beach for Rutile