Reference no: EM133433662
Question: ABC is looking into the possibility of opening a mine in British Columbia. The company's geologist has just completed his analysis of the potential mine site. He estimated that the mine would be productive for a period of 8 years, after which it would be closed. The CFO has used the estimates provided by the geologist to determine the revenues that could be generated from the mine. He also projected the various costs that the company would face, namely the costs of opening the mine and the annual expenses. If the company decides to open this new mine, it would cost $500 million today and would have to spend $80 million in 9 years to close it. The cash flows for years 1 through 8 are $60 million, $90 million, $170 million, $230 million, $205 million, $140 million, $110 million and $70 million respectively. The company requires a 12% rate of return on all the mines it owns.
1. After defining the average book rate of return, net present value, payback period, internal rate of return and profitability index, give two payback period, internal rate of return, and profitability index, give two advantages and two disadvantages of each. advantages and two disadvantages of each of these methods.
2. Calculate the payback period, internal rate of return, net present value and profitability index for the project. the profitability index for the proposed mine opening in British Columbia.
3. Based on the results of your analysis, should the company open the mine?