A mining company has already located an economically viable copper deposit and is re-assing the after-tax cash flows and economics as they enter development. The project involves the costs and production characteristics summarized in the table below. Calculate the after-tax cash flow (ATCF) for this venture. Assume a 6-month deduction for all amortizable costs begin in the year such costs are incurred. Assume all equipment and infrastructure costs will be depreciated based on the MACRS 7-year schedule assuming the half-year convention. Start all depreciation at the end of year one when all assets are assumed to be in a condition or state of readiness and available for service. Assume a 3.0% royalty (tax) on the gross revenue from the mine each year. To simplify this analysis, write off all remaining book values against the assumed sale value of $2 billion at the end of year four and assume any gain will be taxed as ordinary income. Other income exists against which to use all deductions in the year incurred. Assume a 21% federal income tax rate and a 5.0% state income tax that is deductible for computing Federal taxable income. This project is in the United States and the investor is seeking a 15% after-tax minimum rate of return.

Note: Annual revenue is calculated on the net pounds of refined copper each year which is based on (annual tonnage) X (pounds per tonne) X (average grade) X (solvent extraction recovery rate). "M" represents millions and tonnes are metric measures with equivalent pounds per tonne as summarized in the table below.

Calculate the after-tax cash flows (ATCF's) for the project and corresponding DCFROR, NPV, and PVR.

Auxiliary Problem 8-7, Copper Mine Model, M = 1,000,000 Year 1 2 3 4 4 Sale Production, Tonnes of Ore in N 10 17 17 Tonnes of Reserves @ Beginning of Yr 200 190 173 156 139 Pounds per Tonne 2,205 2,205 2,20 2,205 Average Grade 0.01 0.015 1.015 0.015 Solvent Extraction Recovery 0.990 0.990 0.990 0.990 Cu Price $ per Pound 3.00 $ 3.00 $ 3.00 $ 3.00 Operating Costs, $ per Pound of Cu 1.20 $ 1.20 $ 1.20 1.20 Project Sale Value in $M 2,000 Capital Investment in M$ Cum. Mine Acquisition 50 50 o o Mine Development 250 250 Mine Equipmen 600 100 1,300 Infrastructure 25 40 65 Working Capital 20 30 50 MACRS 7 Years 0.1429 0.2449 0.1749 0.1249 0.3124 Corporate After-Tax Cash Flow in Millions Year 2 3 4 4 Sale Cum. Pounds of Finished Cu Gross Revenue -Royalty, 3.0% Net Revenue -Operating Costs/ WC Operating Profit Mine Development, 70% Depreciation -Amortization Taxable Before Depletion 50% Limit 15% Depletion Cost Depletion -Actual Depletion Taken, (T 7-4) State Taxable Income -State Income Tax, 59 Federal Taxable Income -Federal Income Tax, 21% Net Income +Depreciation +Mine Develop & Amortization +Depletion Taker +Working Capital -Mine Acquisition -Mine Development -Mine Equipment Infrastructure -Working Capital After-Tax Cash Flow Adjusted After-Tax Cash Flow Net Present Value @ 15% Present Value Ratio DCFRORAuxiliary Problem 8-7A, M = 1,000,000, t = Metric Tonne Year 0 2 3 4 Production, Tonnes of Ore in M 10 17 17 17 Reserves @ Beginning of Year in M 200 190 173 156 139 Pounds per Tonne 2,204.62 2,204.62 2,204.62 2,204.62 Average Grade 0.015 0.015 0.015 0.015 Solvent Extraction Recovery 0.990 0.990 0.990 0.990 Cu Price $ per Pound 3.00 3.00 3.00 3.00 Operating Costs, $ per Pound of Cu 1.20 1.20 1.20 1.20 Project Sale Value in M$ 2,000 Capital Investment in M$ Mine Acquisition 50 Mine Development 250 Mine Equipment 900 400 Infrastructure 25 40 Working Capital 20 30