Question 1 Sunshine Inc has discovered a new gold deposit in the Dumfries mountains and must now decide whether to mine the deposit. The most cost-effective way to do so is to use a method called sulphuric acid extraction. However, the use of this process has certain environmental effects that may breach Scotland environmental regulations and/or result in a need for additional work to restore the vegetation around the site. The company also needs to invest in new mining equipment.

The management has asked you to perform a financial analysis to help them decide if it is worthwhile to pursue project. You are provided the following financial parameters:

Estimated life of the gold deposit : 6 years Purchase of new equipment : $1,015,000 Equipment installation cost : $180,000 Required rate of return : 15%

Expected net cashflows generated at the end of each year from the extraction and sale of the gold deposits are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $150,000 $275,000 $600,000 $600,000 $300,000 $100,000

1. Required: a. Based on the financial parameters provided above, compute the following: i Payback Period ii Profitability Index iii Net Present Value iv Internal Rate of Return

2. Suppose the equipment deployed on the project can likely be sold for 20% of its original cost at the end of the project. Show appropriate workings that quantify the impact of this on the NPV and IRR of the project that you derived earlier.