33333333

docx

School

University of Calgary *

*We aren’t endorsed by this school

Course

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by ChiefKnowledge2285

Using the provided information and the required rate of return of 12%, let's calculate the NPV for the new strip mine project: 1. Calculate the initial investment: Land purchase cost: $5 million Equipment cost: $85 million Initial Investment = $5 million + $85 million = $90 million 2. Calculate the annual cash flows from the project: Year 1: Revenue from the contract: 500,000 tonnes/year * $82/tonne = $41 million Revenue from excess production: 620,000 tonnes * $76/tonne = $47.12 million Variable costs: 620,000 tonnes * $31/tonne = $19.22 million Fixed costs: $4.1 million Working capital investment: 5% of total sales = 5% * ($41 million + $47.12 million) = $4.42 million Cash Flow at Year 1 = $41 million + $47.12 million - $19.22 million - $4.1 million - $4.42 million = $60.38 million Year 2: Revenue from the contract: 500,000 tonnes/year * $82/tonne = $41 million Revenue from excess production: 680,000 tonnes * $76/tonne = $51.68 million Variable costs: 680,000 tonnes * $31/tonne = $21.08 million Fixed costs: $4.1 million Working capital investment: 5% of total sales = 5% * ($41 million + $51.68 million) = $4.63 million Cash Flow at Year 2 = $41 million + $51.68 million - $21.08 million - $4.1 million - $4.63 million = $62.87 million Year 3: Revenue from the contract: 500,000 tonnes/year * $82/tonne = $41 million Revenue from excess production: 730,000 tonnes * $76/tonne = $55.28 million Variable costs: 730,000 tonnes * $31/tonne = $22.63 million Fixed costs: $4.1 million Working capital investment: 5% of total sales = 5% * ($41 million + $55.28 million) = $4.82 million

Cash Flow at Year 3 = $41 million + $55.28 million - $22.63 million - $4.1 million - $4.82 million = $64.73 million Year 4: Revenue from the contract: 500,000 tonnes/year * $82/tonne = $41 million Revenue from excess production: 590,000 tonnes * $76/tonne = $44.84 million Variable costs: 590,000 tonnes * $31/tonne = $18.29 million Fixed costs: $4.1 million Working capital investment: 5% of total sales = 5% * ($41 million + $44.84 million) = $4.29 million Cash Flow at Year 4 = $41 million + $44.84 million - $18.29 million - $4.1 million - $4.29 million = $58.25 million 3. Determine the salvage value of the equipment at the end of the project: Salvage Value = Equipment cost * 60% = $85 million * 60% = $51 million 4. Calculate the cash flow at the end of year 5 for land reclamation cost: Cash Flow at Year 5 = Cost of reclamation = $2.7 million 5. Calculate the cash flow at the end of year 6 for the charitable expense deduction: Cash Flow at Year 6 = Charitable expense deduction = $6 million 6. Calculate the present value factor for each year using the company's required return rate of 12%: PV Factor = 1 / (1 + Required Return Rate)^Year Year 1: PV Factor = 1 / (1 + 12%)^1 = 0.8929 Year 2: PV Factor = 1 / (1 + 12%)^2 = 0.7972 Year 3: PV Factor = 1 / (1 + 12%)^3 = 0.7118 Year 4: PV Factor = 1 / (1 + 12%)^4 = 0.6355 Year 5: PV Factor = 1 / (1 + 12%)^5 = 0.5674 Year 6: PV Factor = 1 / (1 + 12%)^6 = 0.5066 7.Discount each cash flow to its present value using the respective PV factor: Present Value = Cash Flow * PV Factor Year 1: Present Value = $60.38 million * 0.8929 = $53.92 million Year 2: Present Value = $62.87 million * 0.7972 = $50.09 million Year 3: Present Value = $64.73 million * 0.7118 = $46.14 million

Year 4: Present Value = $58.25 million * 0.6355 = $37.00 million Year 5: Present Value = $2.7 million * 0.5674 = $1.53 million Year 6: Present Value = -$6 million * 0.5066 = -$3.04 million (negative because it's a charitable expense deduction) 8. Sum up all the present values to calculate the NPV: NPV = Sum of Present Values - Initial Investment NPV = $53.92 million + $50.09 million + $46.14 million + $37.00 million + $1.53 million - $3.04 million - $90 million NPV = $96.54 million - $90 million NPV = $6.54 million The calculated NPV for the new strip mine project is $6.54 million. Since the NPV is positive, it indicates that the project is expected to generate a positive return and may be considered favorable. Beaver Mining should take the contract and open the mine. However, it's important to note that the NPV calculation is based on the given assumptions and estimates, and any changes to those factors can affect the project's profitability. Certainly! I will perform the calculations to determine the NPV of the SuperTread project. Step 1: Initial Investment Initial Investment = $10 million (Research and development costs) + $160 million (Production equipment cost) + $9 million (Working capital requirement) Initial Investment = $179 million Step 2: Cash Flows from the OEM Market Year 1: Cash Flow at Year 1 (OEM Market) = -$10.264 million Years 2-4: Cash Flow at Year 2 (OEM Market) = -$10.264 million * (1 + 3.25%) = -$10.616 million Cash Flow at Year 3 (OEM Market) = -$10.264 million * (1 +

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

3.25%)^2 = -$10.978 million Cash Flow at Year 4 (OEM Market) = -$10.264 million * (1 + 3.25%)^3 = -$11.351 million Step 3: Cash Flows from the Replacement Market Year 1: Cash Flow at Year 1 (Replacement Market) = $84.48 million Years 2-4: Cash Flow at Year 2 (Replacement Market) = $84.48 million * (1 + 3.25%) = $87.31 million Cash Flow at Year 3 (Replacement Market) = $84.48 million * (1 + 3.25%)^2 = $90.26 million Cash Flow at Year 4 (Replacement Market) = $84.48 million * (1 + 3.25%)^3 = $93.33 million Step 4: Salvage Value of Production Equipment Salvage Value = $65 million * (1 + 3.25%)^4 = $71.31 million Step 5: Present Value Factors PV Factor Year 1 = 1 / (1 + 13.4%)^1 = 0.8817 PV Factor Year 2 = 1 / (1 + 13.4%)^2 = 0.779 PV Factor Year 3 = 1 / (1 + 13.4%)^3 = 0.686 PV Factor Year 4 = 1 / (1 + 13.4%)^4 = 0.6055 Step 6: Discounted Cash Flows Discounted Cash Flow Year 1 = Cash Flow at Year 1 (OEM Market) * PV Factor Year 1 + Cash Flow at Year 1 (Replacement Market) * PV Factor Year 1 Discounted Cash Flow Year 1 = (-$10.264 million) * 0.8817 + $84.48 million * 0.8817 = $69.94 million Discounted Cash Flow Year 2 = Cash Flow at Year 2 (OEM Market) * PV Factor Year 2 + Cash Flow at Year 2 (Replacement Market) * PV Factor Year 2 Discounted Cash Flow Year 2 = (-$10.616 million) * 0.779 + $87.31 million * 0.779 = $66.49 million Discounted Cash Flow Year 3 = Cash Flow at Year 3 (OEM Market) * PV Factor Year 3 + Cash Flow at Year 3 (Replacement Market) * PV Factor Year 3 Discounted Cash Flow Year 3 = (-$10.978 million) * 0.686 + $90.26 million * 0.686 = $58.88 million Discounted Cash Flow Year 4 = Cash Flow at Year 4 (OEM Market) * PV Factor Year 4 + Cash Flow at Year 4 (Replacement Market) * PV Factor Year 4 + Salvage Value * PV Factor Year 4 Discounted Cash Flow Year 4 = (-$11.351 million) * 0.6055 + $93.33 million * 0.6055 + $71.31 million * 0.6055 = $84.90 million

Step 7: Net Present Value (NPV) NPV = Sum of Discounted Cash Flows - Initial Investment NPV = $69.94 million + $66.49 million + $58.88 million + $84.90 million - $179 million NPV = $80.21 million Therefore, the NPV of the SuperTread project is $80.21 million.