The Geology Department of the Government has flashed news that in the hilly track of Madhya Pradesh, there is possibility for mining diamond. A company basically involved in diamond cutting likes to develop its backward linkage and so it is interested in diamond mining. It estimates that if mining is done at a particular rate per day, the operation will continue for the next 6 years, after which the stock of the mine will be finished. The CEO of the company asks its finance officer to evaluate whether it is desirable for the company to undertake this project. The finance officer estimates the cost of opening of the mine at Rs 5.0 million at the present juncture and the annual operating expenditure for the 6-year period at Rs 0.5 million per annum. The closing of the mine and the reclamation of the area will need another Rs 1 million. The finance officer expects an inflow of cash per annum as given below:
1. Calculate the IRR and NPV.
2. Do you feel that on the basis of IRR and NPV, the company should go for mining?
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