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
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
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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?
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