Scenario analysis Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$

Question:

Scenario analysis Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was reopening an old gold mine that had ceased operations in the past due to low gold prices—is C$44,188,992. Reopening the mine would require an up-front capital expenditure of C$67.8 million and annual operating expenses of C$19.42 million. Maritime expects that over a 5-year operating life it can recover 174,000 ounces of gold from the mine and that the project will have no terminal value. Maritime uses straight-line depreciation, has a 21.04% corporate tax rate, and has an 11.2% cost of capital. Before moving forward with the project, Maritime would like to determine the sensitivity of its capital budgeting decision to the market price of gold, which could fluctuate over the 5-year project life.
a. Calculate the internal rate of return (IRR) for the gold mine project if the price of gold drops 10%.
b. Calculate the net present value (NPV) for the gold mine project if the price of gold drops 10%.
c. Calculate the internal rate of return (IRR) for the gold mine project if the price of gold drops 20%.
d. Calculate the net present value (NPV) for the gold mine project if the price of gold drops 20%.
e. Below what price per ounce of gold is Maritime’s reopening of its old gold mine no longer acceptable?

Data From P11-28

With the market price of gold at C$1,562.50 per ounce (C$ stands for Canadian dollars), Maritime Resources Corp., a Canadian mining firm, would like to assess the financial feasibility of reopening an old gold mine that had ceased operations in the past due to low gold prices. Reopening the mine would require an up-front capital expenditure of C$67.8 million and annual operating expenses of C$19.42 million. Maritime expects that over a 5-year operating life it can recover 174,000 ounces of gold from the mine and that the project will have no terminal value. Maritime uses straight-line depreciation, has a 21.04% corporate tax rate, and has an 11.2% cost of capital.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...

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