2. (25 pts) A coal mining project has been online for two years. Engineering mine plan calculations indicate that the present mine production can be increased to the accelerated coal mining annual production schedule as shown below, by changing the mine plan and acquiring additional new equipment. You, the project engineer must decide whether to (1) maintain current production rates or (2) determine if it is economically desirable to accelerate production by purchasing additional mining equipment necessary to increase coal production. Present Production Accelerated EXAM Assume th estimated to product unj year two, c Solution Year 1 2 Production Year Tons (000) Tons (000) 123456789 1200 1200 1300 1600 1500 2000 1700 2150 1400 1700 1300 1500 1200 1300 1100 750 1000 350 10 11 750 300 400 0 The time zero capital cost of the accelerated coal mining production equipment is estimated at $6 million, but the present production plan, time zero cost = $0. The Royalty Rate = 8% of the gross revenues, therefore net revenue after royalties is 92%, and coal price per ton is $39.50. The minimum acceptable rate of return is 10%. Calculate the following on a Before-Tax cash flow basis: a) What is the Present Production NPV (net present value)? b) What is the Accelerated Production NPV? c) Verify your decision by using the incremental approach determine the NPV and the Rate of Return on the $6 million investment (IRR)? (Hint: you must use the incremental approach to find this NPV & ROR.) d) Is it economically desirable to invest the additional capital to increase production? Explain why. e) If the Royalty Rate (on the Accelerated Production only) changed because of the increased production, at what Royalty Rate would it be a break even such that the NPV of both alternatives are equal and you would NOT invest the capital to increase production? 7.5e N Th using dep Cost use de in t