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Question - Zamba Mines is evaluating the acquisition of a mine that will yield 100,000 tons per year over the next 3 years. The initial investment is $450 million, which will be depreciated equally over 3 years. The cost of production is $3000/ton. The current spot price for copper is $5000/ton. Prices are expected to increase at an annual rate of 5% over the next 3 years. The forward prices at t=1,2,3 (in years) are $5150, $5300, $5450, respectively.
Required -
a. If the risk free rate is 3%, the tax rate is 30%, and the WACC is 8%, what is the NPV of this project, if the revenue is hedged using forward contracts?
b. What is the NPV if the output is sold at expected future spot rates?
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