Sell or Process Further; Cash Flow Evaluation; Internal Rate of Return: Algonquin River Products Corporation extracts ores from an open-pit mine. Each year, 400,000 tons of ore are extracted. If the products from the extraction process are sold immediately after removal of dirt, rocks, and other impurities, a price of $65 per ton of ore can be obtained. The company estimates that extraction costs are 75 percent of the net realizable value of the ore. Rather than sell all of the ore at the $65 price, 20 percent of it could be processed further.

To perform the additional processing, the company would install equipment costing $1,300,000. This equipment would qualify for tax depreciation as follows: Year 1, $300,000; Year 2, $400,000; Years 3-5, $200,000 per year. At the end of the six-year project life, the equipment could be salvaged and the company would obtain $50,000 salvage proceeds.

Further processing would cost $6 per ton in addition to the first processing costs. The processed ore would yield two products in equal proportion: A and B. Product A would sell for $44 per one half ton, while Product B would sell for $34 per one half ton.

Average inventory required would increase by 5,000 tons of ore. In addition, a cash balance of $45,000 would be needed to operate the additional process. The company plans to obtain a loan for the project at an interest cost of 16 percent. The loan would be for the entire cost of the project, including inventories and working capital. The company estimates its cost of capital at 20 percent and its marginal tax rate at 40 percent.

Required:

a. Prepare a schedule of the cash flows from the investment and indicate the net present value of the project?

b. What is the internal rate of return from the project?