Question Four:

1. You are an investment analyst working for an investment company and you are offered a Zinc field investment opportunity. If the risk free rate is 2%, using the certainty equivalent method, should your company invest in it or not? Explain why or why not. (Refer to Table 1 below, no decimals are needed)

Table 1

Initial Investment	$60 Million to be depreciated over 5 years using straight line method with zero salvage value
Investment Period	5 years
Total Iron Capacity	10 million tonnes, extracting 2 million tonnes each year
Cost of Extraction per tonne	$45
Forward Price of Iron in next 5 years	$50 per tonne with constant 1% increase each year
Tax rate	30%

(1 mark revenue, 1 mark processing cost, 1 mark depreciation, 1 mark EBIT, 1 marks NOPAT, 1 mark adding back depreciation, 2 marks NPV, 1 mark for investment decision and 1 mark for the investment decision reason)

10. Marks total)

4.2 Explain why an optimistic manager might not accept your analysis (3 marks) and how to convince your sceptical manager (3 marks)?