Hello, I need help calculating the NPV and break-even calculations. I need step-by-step to understand what I am doing. Thank you **Maxine Peru Considers New Mining Venture: An Educational Case Study**Maxine Peru, the CEO of Peru Resources, was deeply engrossed in an engineering report as she entered the executive dining room, scarcely noticing the plate of savory quenelles de brochet and the glass of Corton Charlemagne ’94 set before her.**Engineering Report Findings**The report detailed a proposed new mining project on the North Ridge of Mt. Zircon, where a vein of transcendental zirconium ore had been discovered on land owned by Peru Resources. Test borings indicated that the reserves could yield 340 tons of transcendental zirconium annually over a seven-year period.**Potential for Hydrated Zircon Gemstones**Additionally, the vein was likely to contain hydrated zircon gemstones. However, predicting the quantity and quality of these zircons was challenging due to their tendency to be located in isolated "pockets." The mining engineer estimated an annual yield of 150 pounds of high-quality hydrated zircon gemstones, which were valued at $3,300 per pound.**Financial Aspects**Peru Resources was a family-owned business with total assets of $45 million, including $4 million in cash reserves. The capital required for the new mine represented a significant investment. Despite this, the company’s conservative financing suggested the possibility of borrowing up to $9 million at an interest rate of around 8%.**Operating Costs and Projections**The projected operating costs for the new mine amounted to $900,000 per year. This included $400,000 in fixed costs and $500,000 for variable costs. Ms. Peru believed these forecasts to be credible. However, the primary concerns centered around the initial setup costs for the mine and the selling price of the transcendental zirconium.---**Analysis and Discussion Points:**1. **Feasibility of New Ventures**: Consider the resource potential and market demand.2. **Financial Planning**: Assess borrowing options and impact on company finances.3. **Risk Management**: Evaluate the risks associated with uncertain gemstone yields.4. **Cost Management**: Discuss strategies to manage and possibly reduce operating costs.This case study presents a real-world example of strategic decision-making in resource management and the complexities involved in launching new mining operations. **Analyzing the Feasibility of a New Mining Project: A Case Study****Project Costs and Overruns**Opening the mine and providing the necessary machinery and ore-crunching facilities was estimated to cost $10 million. However, cost overruns of 10% or 15% were common in the mining sector. Additionally, new environmental regulations, if implemented, could raise the mine's cost by $1.5 million.**Alternative Design Considerations**A cheaper design for the mine, potentially reducing its cost by $1.7 million and eliminating much of the uncertainty about cost overruns, was proposed. Unfortunately, this design would significantly increase fixed operating costs to $850,000 per year at planned production levels.**Market Dynamics for Transcendental Zirconium**The current price of transcendental zirconium stood at $10,000 per ton, but predictions about future prices varied widely. Some experts expected prices to rise to as much as $14,000 per ton, while others predicted a drop to as low as $7,500 per ton. Ms. Peru, with no strong views on the matter, estimated that prices would increase with inflation, approximately 3.5% per year. Note that mine operating costs would also be subject to inflation.**Investment Returns**Ms. Peru, leveraging her extensive experience in the mining industry, recognized that investors generally required a forecast of a nominal rate of return of at least 14% for similar projects.**Evaluation and Analysis Techniques**You have been asked to assist Ms. Peru in evaluating this project. Your tasks include:- Conducting a base-case Net Present Value (NPV) analysis.- Undertaking sensitivity, scenario, or break-even analyses as relevant.Assume that Peru Resources pays tax at a 30% rate. Also, assume that the investment in the mine could be depreciated for tax purposes using the straight-line method over 7 years.**Key Considerations for Decision Making**- What forecasts or scenarios should worry Ms. Peru the most?- Where would additional information be most helpful?- Is there a case for delaying the construction of the new mine?This case study prompts us to apply advanced financial analysis techniques to inform investment decisions in a high-stakes and uncertain market environment.

Net Present Value or NPV is a technique which determines the net present value of the project and it…

Opening the mine, and providing the necessary machinery and ore-crunching faciliti was supposed to cost $10 million, but cost overruns of 10% or 15% were common in the mining business. Page 331 In addition, new environmental regulations, if enacted, could increase the cost of the mine by $1.5 million. There was a cheaper design for the mine, which would reduce its cost by $1.7 million and eliminate much of the uncertainty about cost overruns. Unfortunately, this design would require much higher fixed operating costs. Fixed costs would increase to $850,000 per year at planned production levels. The current price of transcendental zirconium was $10,000 per ton, but there was no consensus about future prices." Some experts were projecting rapid price increases to as much as $14,000 per ton. On the other hand, there were pessimists saying that prices could be as low as $7,500 per ton. Ms. Peru did not have strong views either way: Her best guess was that price would just increase with inflation at about 3.5% per year. (Mine operating costs would also increase with inflation.) Ms. Peru had wide experience in the mining business, and she knew that investors in similar projects usually wanted a forecast nominal rate of return of at least 14%. You have been asked to assist Ms. Peru in evaluating this project. Lay out the base-case NPV analysis, and undertake sensitivity, scenario, or break-even analyses as appropriate. Assume that Peru Resources pays tax at a 30% rate. For simplicity, also assume that the investment in the mine could be depreciated for tax purposes straight-line over 7 years. What forecasts or scenarios should worry Ms. Peru the most? Where would additional information be most helpful? Is there a case for delaying construction of the new mine?

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS