Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey

Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $25,000) and concluded the following:

You can extract 1,000 tons of iron ore per year.

There are 4,000 tons of iron ore underneath this land. Once all the ore has been extracted, the project will cease to produce any revenues.

The price of ore will remain constant for the next 4 years. Currently ore sells for $100 per ton.

The operating cost to extract the ore will be $60 per ton for the next 4 years.

We will need to invest in the equipment for this project right now for $100,000.

The equipment will be depreciated over a period of four years using the straight-line method, with an assumed salvage value of zero for tax purposes.

At the end of year 4, we can sell the equipment involved in the project for $20,000.

The expansion requires additional working capital (NWC) of $10,000 from the start (at time t=0) until the end of year 4. At time t=4, working capital decreases to $0.

The tax rate is assumed to be 40%. Your cost of capital is 12%.

Please provide the Free Cash Flow for each year of this project (t=0 through t=4) and compute the projects NPV.

T=0 Cash Flow: $

T=1 Cash Flow: $

T=2 Cash Flow: $

T=3 Cash Flow: $

T=4 Cash Flow: $

The Net Present Value (NPV) of this project is: $

Based on this analysis, should you pursue this project: A. Yes B. No

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Healthcare Finance An Introduction To Accounting And Financial Management

Authors: Louis C. Gapenski

4th Edition

1567932800, 978-1567932805

More Books

Students also viewed these Finance questions

Question

Understand the process of arbitration

Answered: 1 week ago

Question

Know the different variations of arbitration that are in use

Answered: 1 week ago