Valuing Gold Reclaimed from Old Personal Computers A number of industrial products include gold and silver as a component because they have very good conductive properties. The S&M Smelting Company engages in the recovery of gold from such products and is considering a contract to begin extracting the gold from the recycling of personal computers (PCs). The project involves contracting with the state governments of three midwestern states to dispose of their PCs. The project will last for five years, and the contract calls for the disposal of 200,000 PCs per year. Three tons of electronic scrap contains approximately one Troy ounce of gold. Moreover, each PC contains approximately 6 pounds of electronic scrap, and the processing cost involved in extracting the gold is $67.50 per ton of scrap. In addition, the current (spot) price of gold is $592.80, and the forward price curve for the price per ounce of gold spanning the next five years is as follows:

2016	$679.40/ounce
2017	$715.10/ounce
2018	$750.60/ounce
2019	$786.90/ounce
2020	$822.80/ounce

S&M estimates that the firms cost of capital is 10.5%, and the risk-free rate of interest on five-year Treasury bonds is currently 5.0%. In addition, S&M faces a 30% tax rate, and the entire investment of $450,000 made in the project in 2015 will be depreciated using straight-line depreciation over five years with a zero salvage value.

Estimate the after-tax (certainty-equivalent) project free cash flows for the project over its five-year productive life.

Using the certainty-equivalent valuation methodology, estimate the NPV of the project.

Assume that gold prices will increase at a rate of 7% per year over the next five years. What is the NPV of the project using the traditional WACC method of analysis based on expected project free cash flows, where the WACC is estimated to be 10.5%? What rate of growth in gold prices is required to produce the same NPV using the traditional WACC approach as with the certainty-equivalent approach used in Problem 11-10(b)?

Given				Solution Legend
Initial investment	$ 450,000				= Value given in problem
Total PCs scrapped	1,000,000	units			= Formula/Calculation/Analysis required
Electronic scrap per PC	6	pounds			= Qualitative analysis or Short answer required
Gold content	0.33	ounce per ton			= Goal Seek or Solver cell
Life of project	5	years			= Crystal Ball Input
PCs scrapped per year	200,000	units			= Crystal Ball Output
Tons of scrap per year	600
Current price of gold	$ 592.80	per ounce
Cost/ton for processing	$ 67.50
Tax rate	30.0%
Risk free rate	5.0%
WACC	10.5%
Growth in gold prices	7.0%
Forward Price Curve	Gold Price/Ounce	Expected Prices per Ounce
2016	$ 679.40	$ 634.30
2017	715.10	678.70
2018	750.60	726.21
2019	786.90	777.04
2020	822.80	831.43
Solution
a.
Year	Revenues	Processing Costs	Depreciation/ Depletion	NOI	NOPAT	Plus: Depreciation	Project FCF
2016
2017
2018
2019
2020
b.
NPV
c.
Year	Revenues	Processing Costs	Depreciation/ Depletion	NOI	NOPAT	Plus: Depreciation	Project FCF
2016
2017
2018
2019
2020
NPV
To solve for equivalent growth rate, use the following:
Year	Expected Price	Revenues	Processing Costs	Depreciation/ Depletion	NOI	NOPAT	Plus: Depreciation	Project FCF
2016
2017
2018
2019
2020
NPV
Difference Please show how you arrive at each answer