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Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5?

Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5?

Essentials Of Investments
Essentials Of Investments
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
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Problem 1: Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5? Problem 2: You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?
Transcribed Image Text:Problem 1: Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5? Problem 2: You are evaluating a capital budgeting project that should last for 4 years. The project requires $600,000 of equipment with shipping cost of $20,000. The company will use the MACRS depreciation method. The MACRS depreciation rates are 33, 45, 15, and 7 percent. The new equipment would require $50,000 in working capital. The new equipment would reduce before tax labor cost by $220,000. After two years the equipment would be sold for $300,000. Tax rate is 40% and WACC is 10%. Would you accept the project?
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