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4. The Blumsack Super Sand Corporation is considering developing a new site to mine sand used in hydraulic fracturing applications in Texas (called frac sand).
4. The Blumsack Super Sand Corporation is considering developing a new site to mine sand used in hydraulic fracturing applications in Texas (called "frac sand"). The cost of site preparation is $800. The site could produce up to 100 tons of frac sand each year in perpetuity. The current cost to produce and ship frac sand is $5 per ton and the current market price is $7 per ton. There is a 70% chance, however, that problems in supply chain and logistics for just-in-time frac sand delivery will increase the overall production and shipping cost to $8 per ton of frac sand within the next year. There is thus a 30% chance that the cost of delivered frac sand will stay constant at $5 per ton. Should Blumsack Super Sand develop this site? Assume a discount rate of 15%
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