Homework Help is Here – Start Your Trial Now!
Business
Finance
a) You buy a mining site, including exploration rights and there are set up costs of £285m (million). You expect to extract the following value of gold over the next 6 years, net of running costs: £40m, £73.5m, £123.5m, £90.5m, £54.5m and 21m. At the end of year 6 you pay £30m clean-up costs. The site will then be handed back to authorities (as worthless). By calculating the NPV (or otherwise) determine whether one should you go ahead with the project? The cash flows are discounted at 6.8% p.a.

a) You buy a mining site, including exploration rights and there are set up costs of £285m (million). You expect to extract the following value of gold over the next 6 years, net of running costs: £40m, £73.5m, £123.5m, £90.5m, £54.5m and 21m. At the end of year 6 you pay £30m clean-up costs. The site will then be handed back to authorities (as worthless). By calculating the NPV (or otherwise) determine whether one should you go ahead with the project? The cash flows are discounted at 6.8% p.a.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
See similar textbooks
icon
Related questions
Question
3) State any theorems/conditions that you use in determining your solutions. a) You buy a mining site, including exploration rights and there are set up costs of £285m (million). You expect to extract the following value of gold over the next 6 years, net of running costs: £40m, £73.5m, £123.5m, £90.5m, £54.5m and 21m. At the end of year 6 you pay £30m clean-up costs. The site will then be handed back to authorities (as worthless). By calculating the NPV (or otherwise) determine whether one should you go ahead with the project? The cash flows are discounted at 6.8% p.a. b) Explain what is meant by the internal rate of return (IRR) in the context of project appraisal. What are the drawbacks of the IRR method? i) Discuss the pros and cons of the various numerical methods such as the bisection method, linear interpolation technique, the Newton-Raphson method and the secant method in determining the IRR. You should also clearly discuss any methods used in determining the initial iterate. ii) Suppose one estimates that they can afford to repay £1200 a month for 25 years on a mortgage. Interest is calculated at 4.3% p.a., payable monthly. How large a mortgage can the individual afford? iii) How much would an investor pay now (beginning of the month) for an annuity, which pays £1,500 at the end of each month for 10 years, if the current interest rate is 12% p.a. compounded weekly?
Transcribed Image Text:3) State any theorems/conditions that you use in determining your solutions. a) You buy a mining site, including exploration rights and there are set up costs of £285m (million). You expect to extract the following value of gold over the next 6 years, net of running costs: £40m, £73.5m, £123.5m, £90.5m, £54.5m and 21m. At the end of year 6 you pay £30m clean-up costs. The site will then be handed back to authorities (as worthless). By calculating the NPV (or otherwise) determine whether one should you go ahead with the project? The cash flows are discounted at 6.8% p.a. b) Explain what is meant by the internal rate of return (IRR) in the context of project appraisal. What are the drawbacks of the IRR method? i) Discuss the pros and cons of the various numerical methods such as the bisection method, linear interpolation technique, the Newton-Raphson method and the secant method in determining the IRR. You should also clearly discuss any methods used in determining the initial iterate. ii) Suppose one estimates that they can afford to repay £1200 a month for 25 years on a mortgage. Interest is calculated at 4.3% p.a., payable monthly. How large a mortgage can the individual afford? iii) How much would an investor pay now (beginning of the month) for an annuity, which pays £1,500 at the end of each month for 10 years, if the current interest rate is 12% p.a. compounded weekly?
Expert Solution
steps

Step by step

Solved in 3 steps with 2 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Depletions and Amortizations
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education
SEE MORE TEXTBOOKS