The government of a country wants to award a mining concession for 10 years. The mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after whic it would be completely depleted. Note that each tonne of minerals would sell for $2,000, and the mining cost per tonne is $1,000. (a) If the company determines that the discount rate is 1%, what should the company's maximum bid be? [Note that the present value for a future payment a at time t with discount rate r (in percentage) is given by y = ae 100.] (b) The country is expected to experience a military coup and political instability ensues. If you were hired as a consultant by the company, explain whether the company should raise or lower the discount rate when making the bid. Finally, tornrnt the rolationshin between the discount rate and political staldity Thint:
The government of a country wants to award a mining concession for 10 years. The mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after whic it would be completely depleted. Note that each tonne of minerals would sell for $2,000, and the mining cost per tonne is $1,000. (a) If the company determines that the discount rate is 1%, what should the company's maximum bid be? [Note that the present value for a future payment a at time t with discount rate r (in percentage) is given by y = ae 100.] (b) The country is expected to experience a military coup and political instability ensues. If you were hired as a consultant by the company, explain whether the company should raise or lower the discount rate when making the bid. Finally, tornrnt the rolationshin between the discount rate and political staldity Thint:
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
Problem 1PS
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![5.
The government of a country wants to award a mining concession for 10 years. The
mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after which
it would be completely depleted. Note that each tonne of minerals would sell for
$2,000, and the mining cost per tonne is $1,000.
(a) If the company determines that the discount rate is 1%, what should the
company's maximum bid be? [Note that the present value for a future payment a
at time t with discount rate r (in percentage) is given by y = ae 100,
rt
(b) The country is expected to experience a military coup and political instability
ensues. If you were hired as a consultant by the company, explain whether the
company should raise or lower the discount rate when making the bid. Finally,
interpret the relationship between the discount rate and political statdity [hint:
think of the impact that political instability has on profit].](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe91f4b6d-8019-489f-a5ee-c83b4ce1eaee%2F2ce9f352-2102-4131-84fb-3ef93088f2c8%2Fw1zya3_processed.jpeg&w=3840&q=75)
Transcribed Image Text:5.
The government of a country wants to award a mining concession for 10 years. The
mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after which
it would be completely depleted. Note that each tonne of minerals would sell for
$2,000, and the mining cost per tonne is $1,000.
(a) If the company determines that the discount rate is 1%, what should the
company's maximum bid be? [Note that the present value for a future payment a
at time t with discount rate r (in percentage) is given by y = ae 100,
rt
(b) The country is expected to experience a military coup and political instability
ensues. If you were hired as a consultant by the company, explain whether the
company should raise or lower the discount rate when making the bid. Finally,
interpret the relationship between the discount rate and political statdity [hint:
think of the impact that political instability has on profit].
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