Silver Mining Corp (SMC) is analyzing a proposal to test drill a 10,000 acre pot

Question

Silver Mining Corp (SMC) is analyzing a proposal to test drill a 10,000 acre potential field in Peru to test the depth, width, and quality of a suspected underground ore deposit. The drilling process and the testing of the metals will cost $1,000,000. The results will depend on the size of the deposit and the quality of the ore. Analysts estimate that there is a 40.0% probability that the quantity or the quality of the ore will not be good enough to justify mining in the site. On the other hand, there is a 40.0% probability that the ore will be of mineable quality, and a 20% chance that it will be exceptionally good. These are the estimated Net Incremental Cash Flows expected from the project in each possible state of the world:

Condition                    prob.               CF1     CF2     CF3     CF4     CF5

Do not mine                .40                   0          0          0          0          0

Acceptable Deposit    .40                   500K   700K   500K   0          0

Excellent Deposit        .20                   700K   900K   900K   700K   500K

The required return for this type of investment is 15.0%. What is the probabilistically-adjusted NPV for this project? [$23,000]

please include how you got the answer and formula

Explanation / Answer

DO NOT MINE 1 2 3 2*3 YEAR AFTER TAX CASH FLOW PRESENT VALUE FACTOR @12% PRESENT VALUE 1 0 0.87 0 2 0 0.756 0 3 0 0.658 0 4 0 0.572 0 5 0 0.497 0 total 0 ACCEPTABLE DEPOSIT 1 2 3 2*3 YEAR AFTER TAX CASH FLOW PRESENT VALUE FACTOR @12% PRESENT VALUE 1 500000 0.87 435000 2 700000 0.756 529200 3 500000 0.658 329000 4 0 0.572 0 5 0 0.497 0 total 1293200 EXCELLENT DEPOSIT 1 2 3 2*3 YEAR AFTER TAX CASH FLOW PRESENT VALUE FACTOR @12% PRESENT VALUE 1 700000 0.87 609000 2 900000 0.756 680400 3 900000 0.658 592200 4 700000 0.572 400400 5 500000 0.497 248500 total 2530500 1 2 3 2*3 CONDITION PROBABILITY PRESENT VALUE OF CASH FLOW VALUE DO NOT MINE 0.4 0 0 ACCEPTABLE DEPOSIT 0.4 1293200 517280 EXCELLENT DEPOSIT 0.2 2530500 506100 1023380 CASH OUTFLOW $1,000,000 CASH INFLOW $1,023,380 NET PRESENT VALUE $23,380

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