Questions Based on Session $3$

$4$ A widget factory costs $$700,000$ and will produce net cash flow starting next year of

$$100,000$ per year for $10$ years after which it will turn to dust. If the discount rate is $11\%,$ what is

the NPV$?$ What is the IRR?

$5$ 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 $$150M$ today $($year $0),$

$$70M$ next year $($year $1)$ and would increase capacity in years $3$ to $9$ by $18$ M pounds ${?}^1$

$($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 $18Mx(P-$$$4),$ where P is the price of molybdenum$]$

b$)$ An investment to expand capacity at its Henderson mine would cost $$60M$ today $($year $0),$

$$25M$ next year $($year $1)$ and would increase capacity by $10$ M pound per year from years

$3$ to $9.$ The variable costs of extracting molybdenum from this location would be

$$5/$pound$.$

c$)$ Reopening of its Kitsault mine would require an investment of $$15M$ today $($year $0),$ $$8M$

in year $1$ and $$8M$ in year $2$ and would increase capacity in years $3$ to $9$ by $8$ M pounds.

The variable cost of extraction would be $$\frac{6}{?}$ pound.

If the discount rate is $12\%,$ find the price of molybdenum above which it makes sense to do each

of the investments a$),$ b$),$ and c$).$ i$.$e$.$ find the price at which the NPV is zero for each scenario.