6. You are asked to evaluate a mining project with costs in the developmental st
ID: 2779584 • Letter: 6
Question
6. You are asked to evaluate a mining project with costs in the developmental stage followed by benefits in the production stage and ending with significant costs at the end of the study period for reclamation of the land to its original state. You have determined that the project has two positive IRRs. a. Summarize a strategy for modifying the CB C cash flow pattern into a simpler CB cash flow pattern with just one IRR solution and a straightforward decision rule. b. Ilustrate your strategy with the following example: Capital cost at t-0 is $70 million; Constant benefits of $40 million in years 1-5; Year 6 reclamation cost of S140 million; Appropriate MARR = 20%. Set up the cash flow diagram, but do not solve for IRR.Explanation / Answer
Cost at the start of the year (Y0) = $70 MN
Benifits Through the next 5 years (Y1-Y5) = $40 MN Each year
Reclamation cost at year 6 (Y6) = $140 MN
Cash Flow Diagram (Adjusted for Present Value)
Discounting Factor
PV
Costs (C) 116.89 MN -> Benifits (B) 119.62 MN
Year 0 1 2 3 4 5 6 Benifit/ (Cost) -$70.00 $40.00 $40.00 $40.00 $40.00 $40.00 -$140.00 MARR @20% 20% 20% 20% 20% 20% 20% 20%Discounting Factor
(1+20%)^0 (1+20%)^1 (1+20%)^2 (1+20%)^3 (1+20%)^4 (1+20%)^5 (1+20%)^6 1 1.2 1.44 1.728 2.0736 2.48832 2.985984PV
-70/1 40/1.2 40/1.44 40/1.728 40/2.0736 40/2.48832 140/2.985984 -$70.00 $33.33 $27.78 $23.15 $19.29 $16.08 -$46.89 Costs (C) -$116.89 Benifits (B) $119.62Related Questions
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