Question
Mexiplata, a silver mining company in Mexico, is considering a mining project that will have an initial cost of $4.5 million and generate revenues of
Mexiplata, a silver mining company in Mexico, is considering a mining project that will have an initial cost of $4.5 million and generate revenues of $3.5 million per year for three years. During the fourth year, the mine will be shut down and there will be substantial clean-up costs to restore the land to its original state, (a process that will be completed during the fourth year.) Mexiplata is considering an alternative mining project which will cost $2 and generate revenues of $1.5 million per year for four years but which does not involve clean-up costs. Mexiplata's weighted average cost of capital is 14%. What must be the clean-up costs during year 4 of the first project in order for Mexiplata to be indifferent between the two projects?
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