What is the net present value of the project

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Golden Resources Corp. (GRC) is considering an extraction of soda ash project from Africa. The initial investment required is $600,000. Expected cash flows over the estimated 5-year life of the project is $180,000 per year. The appropriate discount rate for the project is 15%.

a) Is this project acceptable?

b) Assume the demand for the product is stable. But the quantity of the mineral underground is not known with certainty. It would be known after operating for one year. After operating for one year, the true quantity will be known. It would be large or small with 50:50 chances. If it is large, the company will continue to extract for the remaining 4 years and yearly cash flows will be $300,000 (years 2 - 5). If the mineral quantity is small, the yearly cash flows for the remaining four years will be $60,000 per year. But the company has the right to abandon the project at the end of year by selling it for $200,000. What is the net present value of the project with the option to abandon? What is the value of the option to abandon?

Reference no: EM132386302

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