QUESTION 4 25 MARKS The Mega Corp company is considering Investing funds in purchasing a new mine operation so as to further diversify their asset portfolio. They require to choose one mine of four possible mine sites. Two are copper mine sites located in Australia and the other two are lithium mine sites located in Indonesia. The expected costs of operation vary depending on the ore concentration and the mining technique used, all of which introduce uncertainties (shown in brackets in Table Q4a) below. The estimated expected returns are also shown in Table Q4a below. Cost of Lithium Lithium Copper Mine Copper Mine Operation Mine Mine Site 1 Site 2 Site 1 Site 2 Lowest Costs $120m (0.4) $110m (0.4) $130m (0.5) $120m (0.5) Medium Costs $130m (0.3) $120m (0.4) $140m (0.4) $140m (0.3) Highest Costs $150m (0.3) $140m (0.2) $160m (0.1) $150m (0.2) RETURNS ($m) $170m $150m $165m $160m Table Q4a Before proceeding the Mega Corp company also needs to decide as to whether to initially carryout a geological Survey at each of the mine sites. Based on past experience and data, if a geological Survey is carried out, the expected costs of operations shown in Table Q4a are reduced by 5% but the uncertainties remain the same. The expected returns however, each increase by 2% if the survey is carried out. The cost of carrying out the geological survey is $3m. Before making our final decision we require to take into account the additional costs associated with the mining royalties that are to be paid to each respective country for the privilege of mining in that country. The national mining royalties are given in table Q4b below. National Mining Royalties Royalties to be paid to the Indonesian government 30% of Expected Monetary Value (EMV) Royalties to be paid to the Australian government 40% of Expected Monetary Value (EMV) Table Q4b [12 Marks ] a) Draw a decision tree of the above scenario. b) By calculating the EMV's for each mine site determine which mine site would generate the most profit after taking into account the costs of operation, the mining royalties and as to whether a geological Survey should be carried out or not? c) What are limitations to interpreting the EMV value? [ 10 Marks ] [3 Marks ] QUESTION 4 25 MARKS The Mega Corp company is considering Investing funds in purchasing a new mine operation so as to further diversify their asset portfolio. They require to choose one mine of four possible mine sites. Two are copper mine sites located in Australia and the other two are lithium mine sites located in Indonesia. The expected costs of operation vary depending on the ore concentration and the mining technique used, all of which introduce uncertainties (shown in brackets in Table Q4a) below. The estimated expected returns are also shown in Table Q4a below. Cost of Lithium Lithium Copper Mine Copper Mine Operation Mine Mine Site 1 Site 2 Site 1 Site 2 Lowest Costs $120m (0.4) $110m (0.4) $130m (0.5) $120m (0.5) Medium Costs $130m (0.3) $120m (0.4) $140m (0.4) $140m (0.3) Highest Costs $150m (0.3) $140m (0.2) $160m (0.1) $150m (0.2) RETURNS ($m) $170m $150m $165m $160m Table Q4a Before proceeding the Mega Corp company also needs to decide as to whether to initially carryout a geological Survey at each of the mine sites. Based on past experience and data, if a geological Survey is carried out, the expected costs of operations shown in Table Q4a are reduced by 5% but the uncertainties remain the same. The expected returns however, each increase by 2% if the survey is carried out. The cost of carrying out the geological survey is $3m. Before making our final decision we require to take into account the additional costs associated with the mining royalties that are to be paid to each respective country for the privilege of mining in that country. The national mining royalties are given in table Q4b below. National Mining Royalties Royalties to be paid to the Indonesian government 30% of Expected Monetary Value (EMV) Royalties to be paid to the Australian government 40% of Expected Monetary Value (EMV) Table Q4b [12 Marks ] a) Draw a decision tree of the above scenario. b) By calculating the EMV's for each mine site determine which mine site would generate the most profit after taking into account the costs of operation, the mining royalties and as to whether a geological Survey should be carried out or not? c) What are limitations to interpreting the EMV value? [ 10 Marks ] [3 Marks ]
