Suppose that you are considering developing a new copper mine. The project will

Question

Suppose that you are considering developing a new copper mine. The project will have costs and benefits that occur according to the following schedule:

Construction costs:

Today: $500 million

Revenues: One year from today: $100 million

Two years from today: $100 million

Three years from today: $200 million

Four years from today: $200 million

Cleanup costs:

Five years from today: $50 million

Assume that the costs and benefits occur at one point in each year (e.g., on 11/1/17, 11/1/18, 11/1/19, etc.). Suppose that the interest rate is 5%.

a. Calculate the present value of the costs and benefits of the project.

b. Should you undertake the project? Explain.

c. Suppose you decide to go ahead with the project. On 11/2/19, Rio Tinto offers to buy your mine. When deciding how much you should ask for payment for the project, which costs and benefits should you consider? Explain.

Explanation / Answer

1) calucalation of Present value of cost and benefit as below:

2) we would not undertake this project due to loss of 15.93 million dollars in present value

3) at the end of 3 years ( 11/02/19) i would like to sell my project at minimum value of 172.77 million dollars.

year (Exp)/Income at year end annuity assuming discount Rate@5 % Present Value 0 (500) 1 (500) 1 100 0.95 95.24 2 100 0.91 90.70 3 200 0.86 172.77 4 200 0.82 164.54 5 (50) 0.78 (39.18) (15.93)

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