5. The directors of Starlite Plc are considering the purchase and expoloitation of a disused tin mine, which is being offered for sale for 50,000. A review of the mines history shows that the total amount of pure tin that can be extracted depends upon the type of rock formations in the area and that the following possibilities exist:

Rock Type Total Output (Tin) Probability

A 240 tonnes 0.40

B 120 tonnes 0.40

C 72 tonnes 0.20

If Starlite purchases the mine then the first year will be spent in making the mine operational and this would cost the company 95,000 payable at the end of the year. Production will start from year 2 and the output would be 2 tonnes of tin extracted each year until it gets exhausted this would be irrespective of the Rock type. At current prices , both the resale value of the tin would be 9,900 per year and the labour and other costs would be 187,000 per year. The revenues and costs are expected to rise by 10% each year. The Cashflows occurring at the end of each year. Special mining equipment need be procured in the first year and the cost is estimated to be 48,000. This equipment will be sold immediately on the cessation of production at the purchase price less 200 for every tonne of tin produced. The company has received permission from the present owners of the mine to carry out a geological survey and this enable identify the type of rock. The cost of the survey would be 10,000. The discount rate usually considered by the company is 21%. Should the company proceed to buy the mine?