Reference no: EM133169976

Question - Coal India Ltd (CIL) has just received an order from Tata Power Ltd for supplying coal for its electric generation for the next four years. CIL does not have enough excess capacity at its existing mines to guarantee the contract. The company is considering opening a new mine on 500 acres of land purchased 5 years ago for Rs.5.0 million. However, CIL could receive Rs.5.5 million on an after tax basis if it sold the land today.

CIL will need to purchase necessary equipments at Rs. 50.0 million and it will be depreciated on a five year straight line schedule. The contract runs for only four years.CIL feels that the equipment can be sold for 40% of its purchase price at the end of fourth year. The contract calls for the delivery of 500,000 tons of coal per year @ Rs. 82.0 per ton. CIL feels that coal production will be 620,000 tons, 680,000 tons, 730,000 tons, and 590,000 tons respectively over the next four years. The excess production will be sold in the spot market at an average price of Rs.76.0 per ton. Operating expenses are Rs. 40.0 per ton for four years and the company will require a net working capital investment of Rs.15.0 million every year. The net working capital will be built up in the year prior to the sales and at the end it is sold. CIL faces a 35.0% tax rate and has a 12.0% required return on new mine projects. Calculate the NPV, IRR, PI, and Payback Period for the project and comment of the financial viability. Should CIL accept the order and go ahead with the new mine project?