Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5?

Precious Resources is in the process of setting up mining operations in Papua New Guinea. The company has good estimates on future cash flows; however it is uncertain about the closing cost of the mining operations in 5 years. At this point estimated cash flows are estimated to be $-500 million in year 0, $-150 million in year 1, $150 million in year 2, $500 million in in year 3, $700 million in year 4. The size of the closing cost (cash outflow) in year 5 is uncertain. If the Precious Resources has a companywide IRR of 13% and its cost of capital is 5%, what is the maximum the company can spend on closing down mining operations in year 5?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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