A gold mining company is considering a $1,125 investment in its new high-tech mining equipment to...
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A gold mining company is considering a $1,125 investment in its new high-tech mining equipment to replace its existing old equipment with no salvage value. The company has a fixed supply of gold to be extracted from its gold mine. The new equipment would accelerate gold production resulting in earlier exhaustion of the supply. The table below describes the estimated cashflows associated with the replacement decision. Required Year 0 1 2 Continue Using Old Equipment $0 $6,500 $6,000 Use New Equipment -$1,125 $12,500 $0 Incremental Cashflows. -$1,125 $6,000 -$6,000 a) Based on the incremental cashflows, can the IRR criterion be applied to decide whether or not the new equipment should be acquired to replace the old one currently in use? Explain your answer with calculations. b) Based on the cashflows using the old versus new equipment, what needs to be projected to determine an economically meaningful IRR to decide whether to replace the old equipment? Under what assumption will the replacement decision have a 20% rate of return? Show calculations to support your answer. A gold mining company is considering a $1,125 investment in its new high-tech mining equipment to replace its existing old equipment with no salvage value. The company has a fixed supply of gold to be extracted from its gold mine. The new equipment would accelerate gold production resulting in earlier exhaustion of the supply. The table below describes the estimated cashflows associated with the replacement decision. Required Year 0 1 2 Continue Using Old Equipment $0 $6,500 $6,000 Use New Equipment -$1,125 $12,500 $0 Incremental Cashflows. -$1,125 $6,000 -$6,000 a) Based on the incremental cashflows, can the IRR criterion be applied to decide whether or not the new equipment should be acquired to replace the old one currently in use? Explain your answer with calculations. b) Based on the cashflows using the old versus new equipment, what needs to be projected to determine an economically meaningful IRR to decide whether to replace the old equipment? Under what assumption will the replacement decision have a 20% rate of return? Show calculations to support your answer.
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Answer rating: 100% (QA)
a Yes the incremental cashflows can be used to apply the IRR criterion To calculate the IRR we need ... View the full answer
Related Book For
Corporate Finance Core Principles And Applications
ISBN: 9781260571127
6th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Posted Date:
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