a. If the current market price of copper is $10 per ton, what is Oro’s target co

Question

a. If the current market price of copper is $10 per ton, what is Oro’s target cost per ton?

b. Given the $10 market price, should either of the mines be opened?

c. The engineer working on Site Z believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3.50 per ton. The purchase price of the system is $2000, but the costs to restore the size will increase to $30,000 if it is installed. Given the current $10 market price, should Oro install the conveyor and open Site Z ?

Oro Mining, Inc., has just discovered two new mining sites for copper. Geologists and engineers have come up with the following estimates regarding costs and copper yields is opened: Site A Site Z $4.50 $4.20 Variable extraction costs per ton Fixed costs over the life of the mine: Biasting Constructior Maintenance Restoration costs $160,000 $200,000 260,000 30,000 10,000 $480,000 $500,000 240,000 30,000 50,000 Total fixed costs Tatal tons of copper that can be extracted over the life of the mine: 240,000 200,000

Explanation / Answer

a. If the current market price of copper is $10 per ton, what is Oro’s target cost per ton? Ans) Company expected return is 18% Current Price of the Copper is = $10 118 Required rate of return = 18% 118 100 Target cost per ton is = 10*100/118 Target cost per ton is = $       8.47 b. Given the $10 market price, should either of the mines be opened? Ans) Site A Site Z Variable Cost per units = $       4.20 $     4.50 Fixed cost per units = 2 2.5 480000/240000 500000/200000 Total Cost = $       6.20 $     7.00 We can accept the two mining projects c. The engineer working on Site Z believes that if a custom conveyor system is installed, the variable extraction cost could be reduced to $3.50 per ton. The purchase price of the system is $2000, but the costs to restore the size will increase to $30,000 if it is installed. Given the current $10 market price, should Oro install the conveyor and open Site Z ? Ans) Site Z Variable Cost Per units = $       3.50 change in the Fixed Cost = Total fixed cost the machine $     500,000 Increasing in restore cost $       20,000 Fixed cost $         2,000 Total Cost $     522,000 Units to be produced 200000 $       2.61 We can accept the Project Z $       6.11 Note:- There is no information about life of the machine then we assume that it is one year life

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