• Suppose a hypothetical lithium mining company, Northern Lithium, isconsidering building a lithium mine in Northern Quebec. To build the mine, Northern$2$Lithium needs to spend $$50$ million now and an additional $$50$ million at the end of each ofthe next two years. Once the mine is complete, it will start production in the third year for atotal of $8$ years, generating annual cash inflows of $$40$ million. However, during production,the company will incur $$5$ million annually in maintenance costs. At the end of the mine'slife $($the $10$th year$),$ Northern Lithium expects to spend another $$15$ million on environmentalrecovery efforts, a process known as reclamation. Northern Lithium determines that its costof capital $($discount rate$)$ is $15\%.$ Assuming all cash flows except the initial $$50$ million investment take place at the end of the period.

  a$.$ Calculate the present value of costs and the present value of benefits of the project, and determine the NPV of the project. Should Northern Lithium take on this project?

  b$.$ What if Northern Lithium could secure more favorable financing terms that reduce its cost of capital to $10\%?$ Should the company take on this project?

  
  

 

 

Answer rating: 100% (QA)

a To calculate the present value PV of costs and benefits and determine the net present value NPV of the project we need to discount the cash flows us... View the full answer