AMAX Corporation is a mining company that focuses on extraction of molybdenum-a crucial additive in the production of steel. AMAX is considering expanding its molybdenum capacity and is deciding whether to pursue one of the following investment alternatives:
a) An investment to expand capacity at its Climax mine would cost $100M today (year 0), $50M next year (year 1) and would increase capacity in years 3 to 9 by 15M pounds (note there is no cash flow in year 2). The variable cost of extracting molybdenum at this location would be $4/pound. [Hint: nominal annual profits from the increased capacity would therefore be given by 15M x (P - $4), where P is the price of molybdenum]
b) An investment to expand capacity at its Henderson mine would cost $75M today (year 0), $30M next year (year 1) and would increase capacity by 13M pound per year from years 3 to 9. The variable costs of extracting molybdenum from this location would be $4.5/pound.
c) Reopening of its Kitsault mine would require an investment of $25M today (year 0), $10M in year 1 and $10M in year 2 and would increase capacity in years 3 to 9 by 10M pounds. The variable cost of extraction would be $6/pound. If the discount rate is 16%, find the price of molybdenum above which it makes sense to do each of the investments a), b), and c).

Answer rating: 100% (QA)

a 622 b 709 c 73678 Stepbystep explanation a Let the sale price P According to Net Present Value met... View the full answer