Question
(a). Peppermill Mining Corporation is set to open a gold mine near Cheyenne, Wyoming. The mine will cost $ 5,000,000 to open. It will generate
(a). Peppermill Mining Corporation is set to open a gold mine near Cheyenne, Wyoming. The mine will cost $ 5,000,000 to open. It will generate a cash flow of $ 800,000 every year forever. The appropriate cost of capital for this project is 10% per year. Please compute the payback, discounted payback, NPV and IRR of this project. Should the mine be opened? At what cost of capital would Peppermill be indifferent between accepting or rejecting the project? Be precise. (b). Now suppose Peppermill Mining will operate the mine for only 8 years. The company predicts the mine will be sold at $ 3 million (in after-tax dollars) in 8 years. Again, assume the cost of the mine is still $ 5,000,000 and the cost of the capital is 10% per year. As before, the mine will generate a cash flow of $ 800,000 per year. Please compute both IRR and NPV for this project. Should the mine be opened? The company is not sure about the salvage value of the mine in 8 years. At what salvage value in 8 years would the company break even in this project (i.e., NPV=0)?
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