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What is the NPV of this project

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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?

Reference no: EM132967936

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