Pr Copper Corp. is considering the renovation of the haul road at one of its open pits

Fantastic news! We've Found the answer you've been seeking!

Question:

Pür Copper Corp. is considering the renovation of the haul road at one of its open pits at its Nigerian mine. Last year, Pür paid $80,000 to an engineering consultant who recommended a new type of road surface that would reduce the pit's operating cost significantly.

The new road surface requires an initial investment of $575,000. The maintenance cost of the road is estimated to be $325,000 per year. When the pit closes, 10 years from today, the site will have to be remediated and the removal cost of the haul road is estimated to be $150,000.

This new road will result in lower annual maintenance and operating costs for the hauling trucks. The consultant estimated the maintenance costs will be decreased by 22.5% and fuel consumption will be reduced by 15% per year.

Exhibit 1: Estimated Cost Savings (before tax)

	Current Costs (per year)	Estimated Savings	Total Cost Savings ($)
Maintenance	$900,000	22.5%
Fuel	$1,650,000	15%
Total Cost Savings per year

The construction of the new road will lead to an immediate increase of $36,000 in raw material inventories.

Given a CCA rate = 8%; a tax rate = 30% (assume no implications at the end of the project's life); and a risk adjusted discount rate = 14%, should Pür Copper Corp. undertake this project?

6a. Calculate the project's Net Present Value (NPV) by components and using the Sample Proforma Assignment 4 spreadsheet. Show your work in the spaces provided hereafter. Round your final results to the next dollar.

Answer: NPV =

Should Pür undertake this Project? Yes or No? Why?

Recommendation:

NPV = - CF₀ + (PV of Operating Cash Flows) + (PV of CCA Tax Shield) + PV (ECF_n)

Calculate -CF₀ = (C₀+ ∆NWC₀ + OC) Show your calculations

Calculate PV of Operating Cash Flows Show your calculations

Calculate PV of CCA Tax Shield Show your calculations

Calculate PV of ECF_n= (SV_n + ∆NWC_n) (assume no tax implications) Show your

Calculations

6b. Complete Question 6 by creating an After-Tax Cash Flow Proforma (not by components) spreadsheet and include a copy below.

Calculate the project's NPV and IRR using your spreadsheet.

After Tax Cash Flow Pro Forma Format

Operating Cash Flows

= Taxable Income

Taxes Payable

= After Tax Income

+ CCA

= After Tax Cash Flow (Net Cash Flow)

Include a copy of your Pro Forma here:

6c. Instead of the incremental Income and Operating Costs being constant throughout the life of the project, assume that income will increase by 2% and the maintenance costs will decrease by 1% per year. Re-calculate the project's NPV and IRR using your spreadsheet and include a copy. Should the project be accepted or rejected?