Droga Minerals plc is examining the possibility of tendering for the rights to exploit minerals that have been found in a mountain range in Alaska. Surveyors acting for the business have spent the last year examining the size of the mineral reserves and, in so doing, have incurred costs of 1.4 million. On the basis of the surveyors' report that has just been submitted, the director of operations believes that the business will require the immediate purchase of equipment costing 18.4 million to exploit the mineral wealth and that these assets can be sold for 6.4 million in four years' time when the mineral reserves are exhausted. The assistant to the finance director of the business has prepared the following projected income statements for each year of the life of the proposed project. (Click here to view the project income statements.) The following information is available: (1) The project will require an immediate investment of 1.2 million of working capital until the end of the four years. (2) Head office expenses consist of 400,000 relating to amounts incurred in managing the new project and 500,000 representing an apportionment to the project of total head office expenses so that it bears a fair share of these expenses. (3) At the end of the project, the business will be required to make good any environmental damage to the mountain range, at an estimated cost of 1.0 million. This will be paid at the end of year 5. (4) The survey costs represent those costs already incurred to date and will be written off in the first year of the project. (5) Interest charges relate to the finance to be raised to purchase the assets required to carry out the project. The business has a cost of capital of 10%. Ignore taxation. Required: Prepare calculations that will help the business to determine the maximum amount that should be paid to acquire the rights to exploit the mineral reserves. (Work in million to one decimal place.) (Click here to view the notes.) (Fill in the relevant cells with its corresponding figures. Negative figures should be entered in brackets.) (Calculate discount factors to 2 decimal places.) Droga Minerals plc The maximum that Droga Minerals will be prepared to pay will be equal to the NPV of the project. Incremental cash flows Year 0 1 2 3 5 m m m m m m Working capital Equipment Revenue Operating costs Site repair Head office expenses Discount factor (10%) Present value NPV m Projected income statements Year 1 2 3 4 m m m m Revenue 13.6 14.2 9.5 5.8 Operating costs (4.0) (4.5) (3.6) (3.2) Depreciation of equipment (3.0) (3.0) (3.0) (3.0) Head office expenses (0.9) (0.9) (0.9) (0.9) Survey costs (1.4) Interest charges Profit (loss) (2.0) (2.0) (2.0) (2.0) 2.3 3.8 (0.0) (3.3) Notes: 1. Depreciation of the equipment should be ignored as it is a non-cash expense. 2. Only those head office expenses that are incurred as a direct result of the project are taken into account. 3. Interest charges are ignored, as the cost of capital is taken into account in the discounting process