Problem:
After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to mine the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that results in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year over the 5-year life of the vein. CTC's cost of capital is 17%. For the purposes of this problem, assume that the cash inflows occur at the end of the year.
Required:
Question 1: What is the project's NPV?
Question 2: What is the project's IRR?
Note: Provide support for your underlying principle.