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A mining company is considering to open a new coal mine. The company has collected the following information about the cash flows associated with the mine:

Equipment needed for new mine

$900,000

Working capital required for new mine

$210,000

Expected annual cash inflow from the sale of coal

$750,000

Annual cash expenses associated with the new mine

$500,000

Road repairs after 5 years

$105,000

The coal in the mine would be exhausted in 15 years. The equipment would be sold for a salvage value of $250,000 at the end of 15-year period. The company uses straight line method of depreciation and does not take into account the salvage value while computing depreciation for tax purposes. The tax rate of the company is 30%.

Required:

1. Compute net present value of the new mine assuming a 15% after tax cost of capital.

2. Should the mine be opened?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91594761
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