Recent increases in gold prices have prompted TomKat Goldfields,Inc. to consider reopening an inactive mine.  Last year,TomKat paid a team of geologists $200,000 to assess the amount ofrecoverable gold at the mine.  The geologists estimatedthat 45,000 troy ounces of gold could still be recovered from themine.   The price of gold is now $800 per ounce, andhedge contracts can be used to lock in this price for up to fiveyears.  Direct excavation costs would be $5.2 million peryear for five years.   These expenditures wouldallow recovery of 5,000 ounces of gold the first year, and 10,000ounces in each of the second through fifth years.  Newmining equipment with a cost of $8 million would be needed rightaway. The equipment could be depreciated according to the five yearMACRS schedule, and would be sold at the end of year 5 for anestimated salvage value of $1.2 million.  The tax rate is21%.

The geologists’ report noted that TomKat has sufficient furnacecapacity at its platinum plant, as Tomkat’s platinum division usesonly 60% of the furnace capacity.   Currently, thatexcess capacity is used to process ore for Bre-Y Mining Inc., inexchange for a payment of $800,000 per year.  Theout-of-pocket cost of running the furnaces (which would beunchanged in any case) is $1.4 million per year, and processing thegold from Tomkat’s mine would require 40% of the furnace capacity.The discount rate is 10% per year.  You can assume thatTomKat has several million dollars of taxable income from otherprofitable operations. (a) Forecast the incremental cash flows toTomKat that would result from reopening the mine, on a year-by-yearbasis. (b) Compute the NPV and the IRR of the proposal to reopenthe gold mine at this point in time.