Reference no: EM133116619

AMAX Corporation is a mining company that focuses on extraction of molybdenum-a crucial additive in the production of steel. AMAX is considering expanding its molybdenum capacity and is deciding whether to pursue one of the following investment alternatives

a) An investment to expand capacity at its Climax mine would cost $100M today (year 0), $50M next year (year 1) and would increase capacity in years 3 to 9 by 15M pounds1 (note there is no cash flow in year 2). The variable cost of extracting molybdenum at this location would be $4/pound. [Hint: nominal annual profits from the increased capacity would therefore be given by 15M x (P - $4), where P is the price of molybdenum] Note this is a one-time increase in annual capacity of 15M pounds that impacts years 3 through to 9. The same applies to the increase described in b) and c).

b) An investment to expand capacity at its Henderson mine would cost $75M today (year 0), $30M next year (year 1) and would increase capacity by 13M pound per year from years 3 to 9. The variable costs of extracting molybdenum from this location would be $4.5/pound.

c) Reopening of its Kitsault mine would require an investment of $25M today (year 0), $10M in year 1 and $10M in year 2 and would increase capacity in years 3 to 9 by 10M pounds. The variable cost of extraction would be $6/pound.

If the discount rate is 16%, find the price of molybdenum above which it makes sense to do each of the investments a), b), and c). i.e. find the price at which the NPV is zero for each scenario.