Reference no: EM133143290
Question - You are the general manager of a small Tungsten mine near Zeehan in Tasmania's west and your motivation is to maximise the mine's net profit while mining sustainably. At the beginning of 2020- 21, you began digging a shaft that was expected to cost $200 million and be complete by the end of that financial year. Upon completion, mining the shaft will provide a profit (after mining and restoration costs, but excluding the shafts digging cost) of $380 million in the financial year after completion and then be exhausted. Assume that the opportunity cost of money the interest rate is 0%, that is you do not have to worry about discounting.
However, the $200 million was spent, but the shaft was not complete and could not be mined and we made a $200 million loss on the project. You estimate that it is only just over half-built and will take another $170 million to complete the project by the end of 2021-22.
Required -
a. Should you abandon the old shaft or complete it? Explain your decision by appropriately using benefit-cost analysis.
b. Suppose that your mining engineer informs you that the additional shaft cost for 2021-22 is not $170, but rather $300.
Should you abandon the old shaft or complete it? Explain your decision by appropriately using benefit-cost analysis.
c. Suppose that 3⁄4 the way through 2021-22 in March 2022 your mining engineer informs you that the $300 million has been spent but there are still an additional $100 million costs that must be paid before the shaft can be mined due to new safety laws. Should you abandon the old shaft or finish it in March 2022? Explain your decision by appropriately using benefit-cost analysis.
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