Scenario analysis For De Beers, one of the biggest companies in the business of diamond exploration, mining, and trading, when the market price of a single 1 carat round-cut diamond is R59,220 (R stands for South African rand) the NPV of its Damtshaa mine, in Botswana, is R22,037,146. The mine is currently being inspected and not functional. Reopening the mine would require an up-front capital expenditure of R70,000,000 and annual operating expenses of R10,000,000.

De Beers expects that over a five-year operating life it can recover 3,000 one carat round diamonds from the mine and that the project will have no terminal value. De Beers uses straight-line depreciation, has a 28% tax rate, and has a 12% cost of capital.

Before moving forward with the project, De Beers would like to determine the sensitivity of its capital budgeting decision to the market price of diamonds, which could fluctuate over the five-year project life.

a. Calculate the internal rate of return (IRR) for the diamond mine project if the price of diamond drops 10%.

b. Calculate the net present value (NPV) for the diamond mine project if the price of diamond drops 10%.

c. Calculate the internal rate of return (IRR) for the diamond mine project if the price of diamond drops 20%.

d. Calculate the net present value (NPV) for the diamond mine project if the price of diamond drops 20%.

e. Below what price per one carat diamond is De Beers’ decision to reopen the mine no longer acceptable?