Reference no: EM132515214

Point 1: Juby Lake Mining (JLM) has been set up to develop a new copper and manganese mine Juby Lake, Ontario. Juby Lake is located in the so-called Ring of Fire, a geographically remote and geologically rich area of Northern Ontario.

Point 2: The easiest way to get at the ore is to completely drain the lake then dig the ore out as an open pit mine. Draining the lake, building mine buildings including dormitories for the miners, plus a service road to get the ore to a railhead, as well as heavy mining equipment will cost $1,500 million. The company will borrow $1,200 million to finance operations. Rates will average 6% per year over the 20-year life of the mine. The loan will be paid back at the end of the life of the mine.

Point 3: At current prices for unrefined ore JLM expects revenues of $500 million per year. Costs for wages, food, fuel, maintenance, transportation of workers in and out of the mine every ten days, and all other costs of operating the mine will be in the range of $275 million per year. At the end of the life of the mine, the lake will be refilled and restocked with fish. Based on similar projects, this remediation will cost $700 million.

Required

Question 1: What is the net annual cash flow from the project for the first ten years?

Question 2: What is the simplified return on investment on JLM's investment?