Papers/PastPapers/PIMI6004201610.por + 1 D Page view A Read aloud IT Add text ID Question 8 - 20 marks The O'Teador Mine is considering the exploration of a nearby site. The company is considering an investment of $15 million in various assets but will only pursue the project if it meets the company's proposed rate of return. The firm expects to invest $5 million in the first year, $7 million in the second year and $3 million in the third year to facilitate extraction of ore thereafter. Only after this third year would extraction begin. A total of 1,000,000 tonnes of ore are projected to be extracted from the site with a head grade equivalency of 0.12 ounces of gold per tonne of ore. Because of the particular technology in use, the company expects to have a 95% recovery rate from the milling process. The government will allow O'Teador to depreciate its assets on a straight line basis for tax purposes over a period of 5 years after the project is operationalized. The company expects to mine 200,000 tonnes of ore, each year for the 5 years. After that, the estimated reserve of gold would be exhausted. The market price of gold is expected to average around $650 per ounce. Operating costs per tonne average $120. Management has set a hurdle rate of 15% for projects with this risk profile. The company anticipates that an investment in working capital of $1,000,000 will be required at the beginning of the project. Because of the need for this kind of investment, the host government has granted O'Teador a tax concession and the company is taxed at a reduced rate of 20% Required: a) Based on the net present value method, should O'Teador undertake the exploration? Show all calculations and briefly justify your answer. (14 marks) b) Briefly discuss three other investment appraisal techniques and offer possible explanations for their usage. (6 marks) a