Jorgenson Mining is considering a new coal mining operation on Mount Pristine. I
ID: 2781441 • Letter: J
Question
Jorgenson Mining is considering a new coal mining operation on Mount Pristine. It will cost $3,500,000 to purchase the land and equipment to begin the 5-year project. The start-up costs will depreciated straight- line to zero over the project's life. The land and equipment will be sold for $1,000,000 at the end of the project. The project will need an additional $50,000 investment in net working capital. Jorgenson predicts that the project will produce 40,000 tons of coal per year and that coal prices will remain at $50 per ton during the project. Variable costs will be $9.00 per ton, fixed costs will be $500,000 per year for the project, the tax rate is 15 percent, and the required return is 14 percent. There are no other costs (ie. interest expense, COGS, etc.). Jorgenson believes its estimate that Mount Pristine will produce 40,000 tons per year is only accurate to within 15 percent (plus or minus). Its other estimates are believed to be very accurate. What is the NPV of project's base case scenario? What is the NPV of project's worst case scenario? What is the NPV of project's best case scenario? What is the financial break-even? Round your answers to the nearest whole number and no commas.Explanation / Answer
The base case NPV is calculated as shown below in the table:
BASE CASE NPV = $604,560.76
The worst case NPV is calculated as shown below in the table:
In the worst case scenario, the number of tons produced will be 40000 *(1-0.15) = 34,000
WORST CASE NPV = $-113,296.47 (negative)
The best case scenario is 40000*(1+0.15) = 46,000
BEST CASE NPV = $1,322,417.99
The financial Breakeven takes place when NPV is 0,
By trail and error, Financial breakven happens at 34,950 Tons
Year 0 1 2 3 4 5 Initial Investment -3500000 Initial Working Cap. -50000 Revenue 2000000 2000000 2000000 2000000 2000000 Variable costs -360000 -360000 -360000 -360000 -360000 Fixed Costs -500000 -500000 -500000 -500000 -500000 Depreciation -700000 -700000 -700000 -700000 -700000 Sale of land/equip. 1000000 Profit Before tax 440000 440000 440000 440000 1440000 Taxes at 15% -66000 -66000 -66000 -66000 -216000 Net Profit 374000 374000 374000 374000 1224000 Add back Depreciation 700000 700000 700000 700000 700000 Add back WC 50000 Operating Cash flow -3550000 1074000 1074000 1074000 1074000 1974000 NPV at 14% $ 604,560.76Related Questions
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