Question
The Bluestone Mining Company is considering three expansion plans. The first, Plan A , is to spend $325 million on a massive expansion of their
The Bluestone Mining Company is considering three expansion plans. The first, Plan A, is to spend $325 million on a massive expansion of their strip mine in Western Australia. This expansion is expected to yield an additional $25 million per year in cash flow over the next 10 years of production. At the end of the production period, Bluestone will need to spend $10 million to return the expansion site to its original condition. The second proposal, Plan B, is to replace the technology at the Western Australia site lowering annual operating costs by $20 million per year. The new technology costs $50 million to implement and has an expected useful life of 10 years. The third option, Plan C, is to acquire the assets of a small independent mining operation in South Africa for $200 million in cash. The South Africa operation is expected to generate an initial cash flow of $15 million per year which is expected to grow 10% annually thereafter. Bluestones cost of capital is 10%. Which expansion plan is the best financial decision for Bluestone since they can choose only one, and why?
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