The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return
is 20%.
Required:
Determine the net present value of the proposed mining project. Should the project be accepted? Explain.
PROBLEM 13-17 Net Present Value Analysis; Internal Rate of Return; Simple Rate of Return
[L013-2. L013-3 L013-6]
Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROl), which has been above 20% each of the last three years. Casey is considering a capital budgeting project that would require a $3,500,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 16%. The project would provide net operating income each year for five years as follows: