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 strip
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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started