ZCCM-IH is a major supplier of iron ore to the steel industry and the company is the 4thlargest supplier of seabome iron ore in the world. The company exports over 34 milliontonnes per year. The company's reserves amount to over a billion tonnes. KonkolaCopper Mine (Konkola) represented a major expansion mining project for ZCCM-IH.ZCCM-IH is considering a new project with an expected life of three years and is expectedto result in an increase in sales revenue of K20 billion in the first year, K30 bilion in thesecond year and K10 billion in the third year. Operating costs will amount to 70% of salesrevenue and the company is required to make an investment in working capital of K6billion at the beginning of the project, which is recoverable at the end of the life of theproject. The cost of the project is K18 billion and the residual value at the end of threeyears is K11 billion. The required rate of return is 14%.Assuming no taxation.A. Calculate ZCCM-IH project's NPV?B. Using IRR as another method for project evaluation, calculate the IRR that ZCCM-IHwill obtain under this project?C. Should ZCCIM-IH invest in this project?[back your justification by using yourcalculations in (a) and (b) above].

Net present value (NPV) is used to determine the present value of all future cash flows. Net present…

Answered: ZCCM-IH is a major supplier of iron ore…

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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Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers $ 310,000 Working capital required $ 190,000 Annual net cash receipts $ 125,000 * Cost to construct new roads in year three $ 58,000 Salvage value of equipment in four years $ 83,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 18%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.…
Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers $ 400,000 Working capital required $ 130,000 Annual net cash receipts $ 145,000*Footnote asterisk Cost to construct new roads in three years $ 46,000 Salvage value of equipment in four years $ 71,000 *Footnote asteriskReceipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 18%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables. Required: What is…
Suppose you have been hired as a financial consultant to Defense Electronics, Incorporated (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.6 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $7.7 million on an aftertax basis. In five years, the aftertax value of the land will be $8.1 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $29.8 million to build. The following market data on DEI’s securities are current: Debt: 185,000 bonds with a coupon rate of 7.7 percent outstanding, 25…
Windhoek Mines, Limited, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in three years Salvage value of equipment in four years $ 320,000 $ 195,000 $ 130,000* $ 59,000 $ 84,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 18%. Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using tables. Required: a. What is the net present value of the…
On January 2, 2021, an Australian Copper Exploration Company was investigating the feasibility of two mutually exclusive investment projects. The first prospective investment involved a strip (open-cut) mining operation in South Wales. The second investment also involved the extraction of copper, but this expenditure would be an underground site in Queensland. Preliminary drilling, sampling and analysis of both sites and consultation with geologists, costing the company $3600,000, suggested that both sites have similar copper reserves and useful lives. The copper extraction process for the two types of mines and the equipment required for operation of the mines are very different, however, with the underground mining operation expected to be more complex and difficult. The process of drilling underground also increases the dangers faced by employees, although it is more environmentally friendly than the pollution and soil erosion caused by open-cut mining operations. For the past…
Highland Mining and Minerals Company is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,648,000 and will produce $338,000 per year in years 5 through 15 and $533,000 per year in years 16 through 25. The U.S. gold mine will cost $2,035,000 and will produce $275,000 per year for the next 25 years. The cost of capital is 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.) a-1. Calculate the net present value for each project. Note: Do not round intermediate calculations and round your answers to 2 decimal places. The Australian mine The U.S. mine Net Present Value a-2. Which…
On January 2, 2021, an Australian Copper Exploration Company was investigating the feasibility of two mutually exclusive investment projects. The first prospective investment involved a strip (open-cut) mining operation in South Wales. The second investment also involved the extraction of copper, but this expenditure would be an underground site in Queensland. Preliminary drilling, sampling and analysis of both sites and consultation with geologists, costing the company $3600,000, suggested that both sites have similar copper reserves and useful lives. The copper extraction process for the two types of mines and the equipment required for operation of the mines are very different, however, with the underground mining operation expected to be more complex and difficult. The process of drilling underground also increases the dangers faced by employees, although it is more environmentally friendly than the pollution and soil erosion caused by open-cut mining operations. For the past…
Disposable Containers Corp. (DCC) is considering a large plant expansion/modernization which will cost $98 million initially and another $62 million at the end of year 3. This project is expected to produce incremental after-tax profits of $29 million, $32 million, $26 million, $42 million, $40 million and $31 million to be received at the end of years 1, 2, 3, 4, 5 and 6 respectively. If the WACC is 9%, what is the project’s NPV? (Start by drawing a timeline.)
Anglogold Ashanti (a gold mining company in South Africa) paid $500 million for the right to explore and extract rare metals from land owned by the Government of Namibia. To obtain the rights, Anglogold Ashanti agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. Anglogold incurred exploration and development costs of $80 million on the project. The company's credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: Cash Outflow Probability $ 15 million 60 % $ 40 million 40 % The asset retirement obligation (rounded) that should be reported on Anglogold's balance sheet one year after the extraction activities begin is? NOTE: For (PV of $1, PVA of $1), use 0.81630 as the appropriate discount factor to solve this problem..…
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,627,000 and will produce $329,000 per year in years 5 through 15 and $518,000 per year in years 16 through 25. The U.S. gold mine will cost $2,042,000 and will produce $280,000 per year for the next 25 years. The cost of capital is 11 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.) a-1. Calculate the net present value for each project. (Do not round intermediate calculations and round your answers to 2 decimal places.) The Australian mine The U.S. mine a-2. Which investment should be made?…
[The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $10.31 million, and the equipment has a useful life of 8 years with a residual value of $1,030,000. The company will use straight- line depreciation. Beacon could expect a production increase of 43,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) 82,000 units Proposed (automation) 125,000 units Production and sales volume Per Unit Per Total Unit Total Sales revenue Variable costs Direct materials Direct labor Variable manufacturing $ 96 $ ? $ 96 $ ? $ 16 $ 16 15 ? 9 9 costs overhead Total variable manufacturing Contribution margin 40 ? $ 56 ? $ 59 ? Fixed manufacturing costs $ 1,240,000 $ 2,330,000 Net operating income. ? ? 5. Recalculate the NPV using a 10 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present…
On January 2, 2021, an Australian Copper Exploration Company was investigating the feasibility of two mutually exclusive investment projects. The first prospective investment involved a strip (open-cut) mining operation in South Wales. The second investment also involved the extraction of copper, but this expenditure would be an underground site in Queensland. Preliminary drilling, sampling and analysis of both sites and consultation with geologists, costing the company $3600,000, suggested that both sites have similar copper reserves and useful lives. The copper extraction process for the two types of mines and the equipment required for operation of the mines are very different, however, with the underground mining operation expected to be more complex and difficult. The process of drilling underground also increases the dangers faced by employees, although it is more environmentally friendly than the pollution and soil erosion caused by open-cut mining operations. For the past…

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