5. The government of a country wants to award a mining concession for 10 years. The...

  

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5. The government of a country wants to award a mining concession for 10 years. The mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after which it would be completely depleted. Note that each tonne of minerals would sell for $2,000, and the mining cost per tonne is $1,000. (a) If the company determines that the discount rate is 1%, what should the company's maximum bid be? [Note that the present value for a future payment a at time t with discount rater (in percentage) is given by y = ae 100.] (4 marks) (b) The country is expected to experience a military coup and political instability ensues. If you were hired as a consultant by the company, explain whether the company should raise or lower the discount rate when making the bid. Finally, interpret the relationship between the discount rate and political stability [hint: think of the impact that political instability has on profit]. (12 marks) 5. The government of a country wants to award a mining concession for 10 years. The mine is expected to yield 15,000 tonnes of minerals each year for 10-years, after which it would be completely depleted. Note that each tonne of minerals would sell for $2,000, and the mining cost per tonne is $1,000. (a) If the company determines that the discount rate is 1%, what should the company's maximum bid be? [Note that the present value for a future payment a at time t with discount rater (in percentage) is given by y = ae 100.] (4 marks) (b) The country is expected to experience a military coup and political instability ensues. If you were hired as a consultant by the company, explain whether the company should raise or lower the discount rate when making the bid. Finally, interpret the relationship between the discount rate and political stability [hint: think of the impact that political instability has on profit]. (12 marks)