Question: Consider the same mining project we discussed above but with different numbers. Assume that the project will deliver $20 million a year if the exchange

Consider the same mining project we discussed above but with different numbers. Assume that the project will deliver $20 million a year if the exchange rate is low and $40 million a year if the exchange rate is high, in both cases during the ten years. Also assume that the initial investment required to start up the project is $200 million.

Finally, keep the probability of successful and failed negotiations with the IMF at 50/50 and the price of the rights to extract copper from the mine at $5 million.

(a) Calculate the project’s NPV based on its expected cash flows.

Should the company buy the rights for it?

(b) Calculate the project’s NPV based on its cash flows if the exchange rate is expected to be low. Should the company buy the rights for it?

(c) Calculate the project’s NPV based on its cash flows if the exchange rate is expected to be high. Should the company buy the rights for it?

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