Question
Sulphur Ridge Mining is considering the development of a new calonium mine at Moose Bend in northern Alberta. The mine would require an upfront investment
Sulphur Ridge Mining is considering the development of a new calonium mine at Moose Bend in northern Alberta. The mine would require an upfront investment of $110 million and would produce 100,000 tons of high-grade calonium a year, which is small compared with the current annual worldwide production of 9 million tons. Proved reserves of calonium at the Moose Bend mine are 1.2 million tons. The extraction cost is estimated at $120 a ton and is expected to remain constant in real terms. The market price of calonium is currently $240 a ton, and the consultancy firm, Powder River Associates, is estimating that the real price of calonium will increase by 3% a year in real terms for the foreseeable future. There are several other producers of calonium. Several Canadian mines are believed to be barely breaking even. Others with costs in the $150 to $200 a ton range are making good profits. There are no taxes and the real cost of capital is estimated as 8%. Calonium mining is an environmentally friendly activity, and there are zero costs to shutting down a mine. Should Sulphur Ridge go ahead with the project? Make whatever additional assumptions you think are needed.
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