A financial-wealth maximizing mining company considers buying a phosphate deposit in the ground. Construction of a...

 

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A financial-wealth maximizing mining company considers buying a phosphate deposit in the ground. Construction of a mine to enable extraction of the phosphate would cost $1 million per year for four years. In the fifth year, extraction would start and last for 12 years. Each year that the mine would extract it would yield net operating revenues, total revenues minus total operating costs, of $600,000. Assume that cash flows occur at the end of each year. What is the net present value of the phosphate deposit and how much, if any, would the company pay for the deposit if a. the interest rate were 10%? (6 pts.) b. the interest rate were 5%? (6 pts.) c. the interest rate were 10%, annual net operating revenues would be $1.6 million or $-400,000 with even odds (50 percent chance of each) during the 12 years of extraction, and the company has and recognizes the option to close the mine at the start of any year, after the four years of construction, when the annual net operating revenues become known with certainty. (6 pts.) A financial-wealth maximizing mining company considers buying a phosphate deposit in the ground. Construction of a mine to enable extraction of the phosphate would cost $1 million per year for four years. In the fifth year, extraction would start and last for 12 years. Each year that the mine would extract it would yield net operating revenues, total revenues minus total operating costs, of $600,000. Assume that cash flows occur at the end of each year. What is the net present value of the phosphate deposit and how much, if any, would the company pay for the deposit if a. the interest rate were 10%? (6 pts.) b. the interest rate were 5%? (6 pts.) c. the interest rate were 10%, annual net operating revenues would be $1.6 million or $-400,000 with even odds (50 percent chance of each) during the 12 years of extraction, and the company has and recognizes the option to close the mine at the start of any year, after the four years of construction, when the annual net operating revenues become known with certainty. (6 pts.)

Answer rating: 100% (QA)

To calculate the net present value NPV of the phosphate deposit we need to discount the cash flows u... View the full answer