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Note : Assume End-of-Year cash flows in any question involving money over time.

A CPI table and unit conversion factors are included on the page

Your company is operating a copper (Cu) mine in Australia and producing and selling copper concentrate (Cu conc) to an overseas custom smelter. You have identified an opportunity to upgrade the plant to improve recovery and generate additional concentrate for the remainder of its life. A similar project was proposed previously. You know the capital cost (in A$) that was estimated then and will use that to generate an initial estimate of the capital cost at Time 0 (which is June 2021) for your new proposal. The tables below show the previous capital cost estimate, the remaining life of the operation, and the increase in both production and the annual operating cost (in A$). You assume that general inflation and cost escalation will continue at the rates indicated in these tables for the remaining life. Capital is all spent at Time 0 and is fully depreciated straight line over the remaining life. Life of Operation 8 years Increased 15,000.0 t/yr Quoted capex was $72.0 million production Extra $9.50 million in June 2016 Annual Cost 30.0% Escalation has been 2.9% / year The tables below show the properties of the extra concentrate you will be selling for the remaining life and your company's projections for copper price and concentrate sales terms. The price and sales terms are provided in nominal US$ for the remaining life. Sea freight and domestic transport costs are in Time 0 dollars and will inflate and escalate at the same rates as the A$ capital and operating costs above. Concentrate Properties Copper Concenetrate Gr Moisture Content Sales Terms Concentrate grade less up to a maximum of Treatment Charges Refining Charges Price Participation Basis Price Up Escalator $6,700 US$/tonne Cu $0.10 US$/dmt of concentrate ** Down Escalator $0.03 US$/dmt of concentrate ** ** Escalators are US$/dmt conc per $/t difference between price paid and basis price Freight and Transport (Time 0 dollars) Sea Freight Domestic Transport Price Data 27.2% Cu 7.8% of wet weight 1.3 units deduction 96.0% of grade $90.00 USD/dmt $0.090 USD/lb $57.50 USD/wmt $34.00 AUD/wmt Cu price in Year 1 $4.50 US$/lb of Cu which then reduces by $0.50 US$/lb each year 3 years for the following then $3.00 US$/lb thereafter Exchange Rate (AUD:USD) 0.7600 Please build your model in nominal dollars but deflate the final net cash flow to real dollars, for presentation to senior management in "dollars of today". You have also found the following additional information needed to determine the weighted average cost of capital. Government Bonds Rate 2.9% Loans Interest Rate 4.2% Market Return 8.6% Debt is 39% of the company's capital Beta 1.30 Calculate the four main DCF measures of value (quote DPBP as the year in which the payback occurs). State whether you would recommend the upgrade or not, and explain your response. CPI Table extract follows. LONGER TERM SERIES: CPI All Groups, Weighted Average of Eight Capital Cities Quarter ending Year March June September December 2010 95.2 95.8 96.5 96.9 2011 98.3 99.2 99.8 99.8 2012 99.9 100.4 101.8 102.0 2013 102.4 102.8 104.0 104.8 2014 105.4 105.9 106.4 106.6 2015 106.8 107.5 108.0 108.4 2016 108.2 108.6 109.4 110.0 2017 110.5 110.7 111.4 112.1 2018 112.6 113.0 113.5 114.1 2019 114.1 114.8 115.4 116.2 2020 116.6 114.4 116.2 117.2 2021 117.9 118.8 Source: Australian Bureau of Statistics Index Reference Period: 2011-12 = 100 Conversion Factors You may need some or all of the following unit conversion factors: A tonne (t) is a "metric tonne" of 1,000 kilograms (kg). 1 t = 2,204.62 pounds (lb) Ounces (oz) of precious metals are "Troy" ounces. 1 oz = 31.1035 grams (g) Au is the chemical symbol for Gold Cu is the chemical symbol for Copper Your company is operating a copper (Cu) mine in Australia and producing and selling copper concentrate (Cu conc) to an overseas custom smelter. You have identified an opportunity to upgrade the plant to improve recovery and generate additional concentrate for the remainder of its life. A similar project was proposed previously. You know the capital cost (in A$) that was estimated then and will use that to generate an initial estimate of the capital cost at Time 0 (which is June 2021) for your new proposal. The tables below show the previous capital cost estimate, the remaining life of the operation, and the increase in both production and the annual operating cost (in A$). You assume that general inflation and cost escalation will continue at the rates indicated in these tables for the remaining life. Capital is all spent at Time 0 and is fully depreciated straight line over the remaining life. Life of Operation 8 years Increased 15,000.0 t/yr Quoted capex was $72.0 million production Extra $9.50 million in June 2016 Annual Cost 30.0% Escalation has been 2.9% / year The tables below show the properties of the extra concentrate you will be selling for the remaining life and your company's projections for copper price and concentrate sales terms. The price and sales terms are provided in nominal US$ for the remaining life. Sea freight and domestic transport costs are in Time 0 dollars and will inflate and escalate at the same rates as the A$ capital and operating costs above. Concentrate Properties Copper Concenetrate Gr Moisture Content Sales Terms Concentrate grade less up to a maximum of Treatment Charges Refining Charges Price Participation Basis Price Up Escalator $6,700 US$/tonne Cu $0.10 US$/dmt of concentrate ** Down Escalator $0.03 US$/dmt of concentrate ** ** Escalators are US$/dmt conc per $/t difference between price paid and basis price Freight and Transport (Time 0 dollars) Sea Freight Domestic Transport Price Data 27.2% Cu 7.8% of wet weight 1.3 units deduction 96.0% of grade $90.00 USD/dmt $0.090 USD/lb $57.50 USD/wmt $34.00 AUD/wmt Cu price in Year 1 $4.50 US$/lb of Cu which then reduces by $0.50 US$/lb each year 3 years for the following then $3.00 US$/lb thereafter Exchange Rate (AUD:USD) 0.7600 Please build your model in nominal dollars but deflate the final net cash flow to real dollars, for presentation to senior management in "dollars of today". You have also found the following additional information needed to determine the weighted average cost of capital. Government Bonds Rate 2.9% Loans Interest Rate 4.2% Market Return 8.6% Debt is 39% of the company's capital Beta 1.30 Calculate the four main DCF measures of value (quote DPBP as the year in which the payback occurs). State whether you would recommend the upgrade or not, and explain your response. CPI Table extract follows. LONGER TERM SERIES: CPI All Groups, Weighted Average of Eight Capital Cities Quarter ending Year March June September December 2010 95.2 95.8 96.5 96.9 2011 98.3 99.2 99.8 99.8 2012 99.9 100.4 101.8 102.0 2013 102.4 102.8 104.0 104.8 2014 105.4 105.9 106.4 106.6 2015 106.8 107.5 108.0 108.4 2016 108.2 108.6 109.4 110.0 2017 110.5 110.7 111.4 112.1 2018 112.6 113.0 113.5 114.1 2019 114.1 114.8 115.4 116.2 2020 116.6 114.4 116.2 117.2 2021 117.9 118.8 Source: Australian Bureau of Statistics Index Reference Period: 2011-12 = 100 Conversion Factors You may need some or all of the following unit conversion factors: A tonne (t) is a "metric tonne" of 1,000 kilograms (kg). 1 t = 2,204.62 pounds (lb) Ounces (oz) of precious metals are "Troy" ounces. 1 oz = 31.1035 grams (g) Au is the chemical symbol for Gold Cu is the chemical symbol for Copper