Ausome has been drilling and doing geochemical sampling across its sites in Northern Canada and one...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Ausome has been drilling and doing geochemical sampling across its sites in Northern Canada and one site has repeatedly tested positive for the presence of gold. Preliminary estimates suggest that the potential extraction from the site in troy ounces over the next 5 years is as follows: Year Troy Ounces 1 150,000 2 165,000 3 180,000 4 230,000 5 220,000 Mining operations will require $20M net working capital to start and additional net working capital investments each year equal to 10% of the projected revenue increase for the following year. A full recovery of NWC is expected at the end of year 5. Total fixed costs are $100M per year, variable production costs are $2,050 per Troy Ounce, and gold prices are currently $2,750 per troy ounce. The gold price is anticipated to rise by 6 percent per year starting in year 2, and variable costs are expected to grow at 5 percent per year starting in year 2. There is an enormous amount of heavy machinery that needs to be transported to the mine site. The heavy equipment will cost $35M and shipping will cost another 5M. The equipment falls into Class 41 for CCA purposes (25%) and the marginal tax rate is still 35%. The equipment is expected to have a value of $9M at the end of the 5-year project. Total expenses for the drilling and geochemical sampling Ausome completed on the site last year cost a total of $500,000. Part 3: a. What is the NPV of the new mine? b. What is the IRR of the new mine? C. If the price of gold, variable costs, and two growth rates are considered to be accurate within 15%, what are the best- and worst-case scenarios? Assume fixed costs will not vary. d. Which of the 4 variables is your NPV most sensitive to, and what are some suggestions you might have for Ausome to protect itself? e. f. Does this project appear to be a good investment to grow Ausome? Would you recommend AuG focus on growth through acquisition of NuGold or through the startup of a new mine site? Why? Ausome has been drilling and doing geochemical sampling across its sites in Northern Canada and one site has repeatedly tested positive for the presence of gold. Preliminary estimates suggest that the potential extraction from the site in troy ounces over the next 5 years is as follows: Year Troy Ounces 1 150,000 2 165,000 3 180,000 4 230,000 5 220,000 Mining operations will require $20M net working capital to start and additional net working capital investments each year equal to 10% of the projected revenue increase for the following year. A full recovery of NWC is expected at the end of year 5. Total fixed costs are $100M per year, variable production costs are $2,050 per Troy Ounce, and gold prices are currently $2,750 per troy ounce. The gold price is anticipated to rise by 6 percent per year starting in year 2, and variable costs are expected to grow at 5 percent per year starting in year 2. There is an enormous amount of heavy machinery that needs to be transported to the mine site. The heavy equipment will cost $35M and shipping will cost another 5M. The equipment falls into Class 41 for CCA purposes (25%) and the marginal tax rate is still 35%. The equipment is expected to have a value of $9M at the end of the 5-year project. Total expenses for the drilling and geochemical sampling Ausome completed on the site last year cost a total of $500,000. Part 3: a. What is the NPV of the new mine? b. What is the IRR of the new mine? C. If the price of gold, variable costs, and two growth rates are considered to be accurate within 15%, what are the best- and worst-case scenarios? Assume fixed costs will not vary. d. Which of the 4 variables is your NPV most sensitive to, and what are some suggestions you might have for Ausome to protect itself? e. f. Does this project appear to be a good investment to grow Ausome? Would you recommend AuG focus on growth through acquisition of NuGold or through the startup of a new mine site? Why?
Expert Answer:
Related Book For
Elementary Statistics Picturing The World
ISBN: 9780321911216
6th Edition
Authors: Ron Larson, Betsy Farber
Posted Date:
Students also viewed these accounting questions
-
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first...
-
The idea of using the difference between the market value of the firm and accounting book values as an indicator of market power and/or valuable intangible assets stems from the pioneering work of...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Which of these situations would require auditors to append an emphasis- of- matter paragraph about consistency to an otherwise unmodified opinion? a. Entity changed its estimated allowance for...
-
The U. S. Postal Service is concerned with the time it takes to deliver mail. It would like not only to deliver mail as quickly as possible but also to have as little variation as possible. Twenty...
-
This problem should be used only in conjunction with Problem 4-3A. It completes the accounting cycle by posting to T-accounts and preparing the post-closing trial balance. Required 1. Using the data...
-
Lois Baiser is the advertising manager for Value Shoe Store. She is currently working on a major promotional campaign. Her ideas include the installation of a new lighting system and increased...
-
The intangible assets section of Redeker Company at December 31, 2010, is presented below. Patent ($70,000 cost less $7,000 amortization)..... $63,000 Franchise ($48,000 cost less $19,200...
-
Current Attempt In Progress Sunland Company produces a product requiring 3 direct labor hours at $16.00 per hour. During January, 1200 products are produced using 4200 direct labor hours. Sunland's...
-
Bond A is zero-coupon bond paying $100 one year from now. Bond B is a zero-coupon bond paying $100 two years from now. Bond C is a 10% coupon bond that pays $10 one year from now and $10 plus the...
-
PLEASE EXPLAINBMX Company has one employee. FICA Social Security taxes are6.2% of the first $137,700 paid to its employee, and FICA Medicaretaxes are 1.45% of gross pay. For BMX, its FUTA taxes are 2...
-
How many units of item J are required to make 63 units of item E? E B(2) J(4) F(2) J(3)
-
The standard cost of Product B manufactured by Oriole Company includes 3.8 units of direct materials at $6.30 per unit. During June, 27,000 units of direct materials are purchased at a cost of $6.20...
-
Explain with the help of case study for GOOD SERVICE TAX.
-
Consider the sample regression equation: y=12+3x 1 -5x 2 +7x 3 -2x 4 .When x 1 increases by 1 unit and x 2 increases by 2 units, while x 3 and x 4 remain unchanged, what change would you expect in...
-
White light is sometimes called full-spectrum lighting. Fromyour observations, was the regular incandescent light-bulb afull-spectrum white light? What about the fluorescent? Explain youranswers.
-
The data that follow are the ratings for six smart phones from each of the four suppliers, three of which cost $650 or more and three of which cost less than $650. The ratings have a maximum value of...
-
The graph of an equation is given. (a) Find the intercepts. (b) Indicate whether the graph is symmetric with respect to the x-axis, the y-axis, or the origin. -3 6 -6 3 x
-
Brandon Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $110,000 per year. 1. Compute the unit cost at a production and sales level of 10,000 units per...
-
Evaluating performance, decision by decision, is costly. Aggregate measures, like the income statement, are frequently used. How might the wide use of income statements affect managers decisions...
-
An administrator at Riverview Hospital is considering how to use some space made available when the outpatient clinic moved to a new building. She has narrowed her choices as follows: a. Use the...
Study smarter with the SolutionInn App