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Company A wishes to purchase a small operating mine, which has a remaining production life of 5 years, from Company B. Company Bs selling price
- Company A wishes to purchase a small operating mine, which has a remaining production life of 5 years, from Company B. Company Bs selling price for the mine is $10,000,000. Company A also plans to invest $2,500,000 in upgrading the mine and its infrastructure in the first year, and no production will occur during the first year. Based on recent history and future projections, the mine is expected to generate an annual, before-tax profit of $5,000,000 for its remaining life, after the upgrades and starting in year 2. At the end of mines production life, it is expected to cost $4,000,000 to close the mine, which will be incurred at the end of the 7th year. The salvage value of the mines equipment is expected to be $1,500,000, which will also occur at the end of the 7th year. Company A requires a minimum rate of return of 15%.
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- Determine if the purchase of this mine is a good investment using NPV.
- What is the PVR
- Draw a Cumulative NPV diagram for the project
- What is the Discounted Payback?
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