Reference no: EM133060159
Question - You are evaluating a mining project in South America. Leasing the land and the mineral rights from the government will cost $430,000 to win the lease and $45,000 annually as the lease payment for 25 years. In the first year developing the deposit will require $100,000 for the initial planning and $400,000 for core drilling to better delineate the deposit. In year 2, $1,300,000 will be required to purchase and install the drag-line. Its salvage value will be zero, and it will cost $180,000 per year to operate. Roads and buildings will cost another $750,000 in year 1 and $200,000 annually. At the start of year 3, the following equipment will be purchased:
16 off-road dump trucks for $150,000 each - ten year life
6 pickups for $25,000 each - five year life
4 loaders for $190,000 each - ten year life
2 conveyors for $325,000 each - ten year life
All the listed equipment from above will have a salvage equal to 10% of the first cost. Annual operating and maintenance costs are estimated to be 33% of the first cost for the vehicles and 20% for the conveyors. Assume purchases of equipment made at the end of their useful lives can be made at the same costs listed above. Assume the dump trucks, pickups, loaders, and conveyers are liquidated at the end of their useful life. If the useful life ends at year 25, use the normal salvage value of 10%. If the useful life does not end at year 25, prorate the salvage value amount starting at 50% if the asset is liquidated the year after purchase up to 10% at the end of useful life.
In year 3, the production volume will be 50,000 tons. This will increase to 75,000 tons for years 4 through 6, but then will fall by 2% per year. The initial yield from the deposit will be 1.3%, but will fall by 0.04% per year (as a percentage). The minerals are worth $1.80 per pound now, which is expected to increase by $0.03 per year.
Calculate the following utilizing Excel:
A. If the interest rate is 9%, find the project's Present Worth (PW).
B. What happens in terms of PW if a labor strike stops production for all of Year 7?C. Run your financial model for 5%, 7%, 9%, 12%, and 15%. Plot PW versus interest rate. What conclusions can you draw from the graph?