Chapter 5, Problem 26QAP

a.

Summary Introduction

Adequate information:

Cost of gold mine=$3,400,000

Economic life = 11 years

Cash inflow at the end of Year 1=$575,000

Growth rate=8%

Abandonment cost at the end of Year 11= $450,000

To compute: Internal rate of return (IRR) for the gold mine

Introduction: IRR is defined as the rate at which the aggregate present value of net cash inflows is the same as the aggregate present value of net cash outflows of the project.

b.

Summary Introduction

Adequate information:

Cost of gold mine=$3,400,000

Economic life = 11 years

Cash inflow at the end of Year 1=$575,000

Growth rate=8%

Abandonment cost at the end of Year 11= $450,000

To determine: Whether the project should be accepted if the required rate of return is 13%.

Introduction: The project should be accepted or rejected by computing the NPV of the project. NPV is the net of the present value of cash inflows and the present value of cash outflows of a project.