Question 1 40 Points The Commonwealth Government is considering allowing a new uranium mine in Northern Australia. It asked your company to provide a cost-benefit analysis of the proposal. The assessment date (time zero in your analysis) is January 2020 when construction will commence, if the project is approved. The early stage of the project involves the removal of overburden and the stockpiling of ore. This will be followed by milling and refining the material into "yellow cake which will be exported. The operations will cease in January 2030. All monetary values given are real, in estimated January 2020 prices. The project will be sold to the private sector for $30 mil when stop operating. The mining company, Uranium North (UN), purchased the small pastoral lease which includes the mining lease in January 2020 for $100 mil. The property will be sold for $30 mil when mining ceases in January 2030. Exploration and feasibility costs for the project were $ million in January 2017, $3 million in January 2015, $2 million in January 2018, and $3 million in January 2019. Capital costs associated with the removal of overburden, construction of roads, accommodation and the on-site factory and the purchase of plant and equipment will be $10 million in January 2020, $8 million in January 2021 and $10 million in January 2022. Working capital costs are $5 million and are incurred two years before output (sales) commences. The sale of outputs of the mining will start in January 2022 for $30 million. Output will be grown by 10% per year until January 2026, and will remain at that level until January 2030. Operating costs are 10% of the value of output. To do this project, UN would need to buy 10 trucks in Jan 2020. The purchasing prices for these 10 trucks is $1 mil in total and the registration fee for using these trucks is $100000. UN will pay income tax of 30% in Australia, and can depreciate its capital costs (excepting land) for tax purposes on a straight line basis, over the life of the project. The consulting company, Kanley and Snapman, estimates that the present value in January 2018 prices) of the costs of environmental damage caused by the mine will be $12 million. UN takes bank loans to get money to do the project and they have to pay interest of $30000 per year. The real discount rate is 10%. Required: (a) Which cost and benefit items are irrelevant in CBA? Explain why. (15 marks) (b) Present your NPV table which shows all working benefit and cost items in CBA (i.e., all the benefit and cost items would be included in the NPV calculation for this CBA project). (15 marks) (c) State whether you would recommend the government allow the mine to be developed. (10 marks) Question 1 40 Points The Commonwealth Government is considering allowing a new uranium mine in Northern Australia. It asked your company to provide a cost-benefit analysis of the proposal. The assessment date (time zero in your analysis) is January 2020 when construction will commence, if the project is approved. The early stage of the project involves the removal of overburden and the stockpiling of ore. This will be followed by milling and refining the material into "yellow cake which will be exported. The operations will cease in January 2030. All monetary values given are real, in estimated January 2020 prices. The project will be sold to the private sector for $30 mil when stop operating. The mining company, Uranium North (UN), purchased the small pastoral lease which includes the mining lease in January 2020 for $100 mil. The property will be sold for $30 mil when mining ceases in January 2030. Exploration and feasibility costs for the project were $ million in January 2017, $3 million in January 2015, $2 million in January 2018, and $3 million in January 2019. Capital costs associated with the removal of overburden, construction of roads, accommodation and the on-site factory and the purchase of plant and equipment will be $10 million in January 2020, $8 million in January 2021 and $10 million in January 2022. Working capital costs are $5 million and are incurred two years before output (sales) commences. The sale of outputs of the mining will start in January 2022 for $30 million. Output will be grown by 10% per year until January 2026, and will remain at that level until January 2030. Operating costs are 10% of the value of output. To do this project, UN would need to buy 10 trucks in Jan 2020. The purchasing prices for these 10 trucks is $1 mil in total and the registration fee for using these trucks is $100000. UN will pay income tax of 30% in Australia, and can depreciate its capital costs (excepting land) for tax purposes on a straight line basis, over the life of the project. The consulting company, Kanley and Snapman, estimates that the present value in January 2018 prices) of the costs of environmental damage caused by the mine will be $12 million. UN takes bank loans to get money to do the project and they have to pay interest of $30000 per year. The real discount rate is 10%. Required: (a) Which cost and benefit items are irrelevant in CBA? Explain why. (15 marks) (b) Present your NPV table which shows all working benefit and cost items in CBA (i.e., all the benefit and cost items would be included in the NPV calculation for this CBA project). (15 marks) (c) State whether you would recommend the government allow the mine to be developed. (10 marks)
