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]

(someone who was helping me stated that there was a present value factor at 12%, with present value factor for year 1 being .87, yr 2: .756, yr 3: .658, yr 4: .572, and yr 5: .497? I do not know if that is correct, but if it is can someone please explain how one would obtain these numbers in order to get the cash inflow in order to compute NPV.)

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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