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EXERCISE: Expanding capacity in molybdenum mines AMAX Corporation is a mining company that focuses on extraction of molybdenum - a crucial additive in the production of steel. AMAX is considering expanding its molybdenum capacity and is deciding whether to pursue one of the following investment alternatives. A) An investment to expand capacity at its Climax mine would cost $100M today (year 0), $50M next year (year 1). It would increase capacity in years 3 to 9 by 15M pounds (note there is no cash flow in year 2). The variable cost of extracting molybdenum at this location would be $4/pound. Hint: nominal annual profits from the increased capacity would therefore be given by: 15M * (P - $4), where P is the price of molybdenum. Year 0 1 2 3 4 5 6 7 8 9 Investment (in $M) - 100 - 50 B) An investment to expand capacity at its Henderson mine would cost $75M today (year 0), $30M next year (year 1). It would increase capacity by 13M pounds per year from years 3 to 9. The variable cost of extracting molybdenum at this location would be $4.5/pound. Year 0 1 2 3 4 5 6 7 8 9 Investment (in $M) - 75 - 30 C) Reopening of its Kitsault mine would require an investment of $25M today (year 0), $10M in year 1 and $10M in year 2. It would increase capacity in years 3 to 9 by 10M pounds. The variable cost of extraction would be $6/pound. Year 0 1 2 3 4 5 6 7 8 9 Investment (in $M) - 25 - 10 - 10 If the discount rate is 16%, find the price of molybdenum above which it makes sense to do each of the investments a), b) and c). Be careful: if you use Excel, it often creates problems with there is an empty cell in a cash flow stream; therefore, you are invited to leave no empty cell but plug in zeros. om/M_zV1

EXERCISE: Expanding capacity in molybdenum mines AMAX Corporation is a mining company that focuses on extraction of molybdenum - a crucial additive in the production of steel. AMAX is considering expanding its molybdenum capacity and is deciding whether to pursue one of the following investment alternatives. A) An investment to expand capacity at its Climax mine would cost $100M today (year 0), $50M next year (year 1). It would increase capacity in years 3 to 9 by 15M pounds (note there is no cash flow in year 2). The variable cost of extracting molybdenum at this location would be $4/pound. Hint: nominal annual profits from the increased capacity would therefore be given by: 15M * (P - $4), where P is the price of molybdenum. Year Investment (in $M) 0 - 100 1 - 2 3 4 5 6 7 8 9 7 8 9 7 8 9 50 B) An investment to expand capacity at its Henderson mine would cost $75M today (year 0), $30M next year (year 1). It would increase capacity by 13M pounds per year from years 3 to 9. The variable cost of extracting molybdenum at this location would be $4.5/pound. Year Investment (in $M) 0 - 75 1 - 2 3 4 5 6 30 C) Reopening of its Kitsault mine would require an investment of $25M today (year 0), $10M in year 1 and $10M in year 2. It would increase capacity in years 3 to 9 by 10M pounds. The variable cost of extraction would be $6/pound. Year Investment (in $M) 0 - 25 1 - 10 2 - 3 4 5 6 10 If the discount rate is 16%, find the price of molybdenum above which it makes sense to do each of the investments a), b) and c). Be careful: if you use Excel, it often creates problems with there is an empty cell in a cash flow stream; therefore, you are invited to leave no empty cell but plug in zeros. 1/1