our mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $25,000) You can extract 1,000 tons of iron ore per year. There are 4,000 tons of iron ore underneath this land. Once all the ore has been extracted, the project will cease to produce any revenues. The price of ore will remain constant for the next 4 years. Currently ore sells for $100 per ton. The operating cost to extract the ore will be $60 per ton for the next 4 years. We will need to invest in the equipment for this project right now for $100,000. -The equipment will be depreciated over a period of four years using the straight-line method, with an assumed salvage value of zero for tax purposes. At the end of year 4, we can sell the equipment involved in the project for $20,000 The expansion requires additional working capital (NWC) of $10,000 from the start (at time t=0) until the end of year 4. At time t-4, working capital decreases to $0. The tax rate is assumed to be 40%. Your cost of capital is 12%. (please round all answers to the nearest dollar) T=0 Cash Flow S T=1 Cash Flow S T=2 Cash Flow S T-3 Cash Flow: $ T=4 Cash Flow S The Net Present Value (NPV) of this project is: $ Based on this analysis, should you pursue this project OA. Yes H
our mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $25,000) You can extract 1,000 tons of iron ore per year. There are 4,000 tons of iron ore underneath this land. Once all the ore has been extracted, the project will cease to produce any revenues. The price of ore will remain constant for the next 4 years. Currently ore sells for $100 per ton. The operating cost to extract the ore will be $60 per ton for the next 4 years. We will need to invest in the equipment for this project right now for $100,000. -The equipment will be depreciated over a period of four years using the straight-line method, with an assumed salvage value of zero for tax purposes. At the end of year 4, we can sell the equipment involved in the project for $20,000 The expansion requires additional working capital (NWC) of $10,000 from the start (at time t=0) until the end of year 4. At time t-4, working capital decreases to $0. The tax rate is assumed to be 40%. Your cost of capital is 12%. (please round all answers to the nearest dollar) T=0 Cash Flow S T=1 Cash Flow S T=2 Cash Flow S T-3 Cash Flow: $ T=4 Cash Flow S The Net Present Value (NPV) of this project is: $ Based on this analysis, should you pursue this project OA. Yes H
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 14P
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