Question
Suppose that you are considering developing a new copper mine that would begin construction on 9/1/2021. The project will have costs and benefits that occur
Suppose that you are considering developing a new copper mine that would begin construction on 9/1/2021. The project will have costs and benefits that occur according to the following schedule:
Construction costs:
Today:$500 million
Revenues:
One year from today:$100 million
Two years from today:$100 million
Three years from today:$200 million
Four years from today:$200 million
Cleanup costs:
Five years from today:$50 million
For simplicity, we'll make the big assumption that the costs and benefits occur at one point in each year (e.g., on 9/1/21, 9/1/22, 9/1/23, etc.).Suppose that the interest rate is 5%.
- Calculate the present value of the costs and benefits of the project.
- Should you undertake the project? Explain.
- Suppose you decide to go ahead with the project. On 9/2/23, Rio Tinto offers to buy your mine.When deciding how much you should ask for payment for the project, which costs and benefits should you consider?
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