The Africa Research Bulletin reported the results of a prefeasibility study by Ironveld plc stating that the grades for pig iron and ferro vanadium were better than expected at its project on the Northern Limb of the Bushveld Complex in South Africa. The prefeasibility study demonstrated the viability of developing the Ironveld pig-iron project delivering 1 Mt/y of pig iron and 9670 t/y of ferro vanadium production for 25 years starting from 2019. The capital cost of the project is estimated at about US\($938\) million. The prefeasibility study estimated a post-tax internal rate of return of 28.8 per cent and a net present value of US\($1.07\) billion, assuming a 10 per cent discount rate. The prefeasibility study was based on pig-iron prices of US\($450/t\) and US\($35/kg\) for ferro vanadium, yielding total annual revenue of R6500 million (US\($657\) million)
at full production.
Questions:
1 Why has the company used both net present value and internal rate of return, but ignored the payback, when undertaking the prefeasibility study?
2 What steps can the company take to ensure that there is less likelihood that incorrect estimates will result in the project not having an acceptable net present value and internal rate of return?