After some encouraging first signs, a mining company is evaluation setting up a goldmine in Western Australia. The mine will take 4 years to prepare and excavate, costing 4payments of $15 million at the start of each year for the next four years, that is, at t=0, 1,2 and 3. Once mining starts, the mine is expected to yield a constant $20 million for thenext 12 years. The first payment is at t=4 and the last at t=15 The required return of themine is 9% pa given as an effective annual nominal rate.All cash flows are real and the expected inflation rate is 2% pa given as an effectiveannual rate. Ignore taxes.The Net Present Value is:a. $72.44mb. $76.67mc. $89.16md. $71.94me. $84.32m

Nominal rate = 9% Inflation rate = 2% As per formula Real rate = [(1+Nominal…

Answered: After some encouraging first signs, 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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A firm is considering an investment in a new machine with a price of $17.6 million to replace its existing machine. The current machine has a book value of $7.3 million and a market value of $6 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $7.25 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $440,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 24 percent. The company uses straight-line depreciation. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) What is the IRR of the decision to purchase a…
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