BEA140 Data Analysis For Business- GreatOreCo mining company
The GreatOreCo mining company wishes to determine whether it should proceed to develop a copper mine for a lease that it owns. There would be substantial development costs involved, and the mine would be expected to have a life span of nine years. The company would also be faced with environmental rehabilitation costs when the mine is closed down, and this is reflected by a smaller contribution in the mine’s final year of operation.
a) Illustrate these cash flows as a fully labelled timeline diagram
b) If the company applies a discount rate of j1 = 15%, determine the Net Present Value (present value of the entire cash flow). Enter this value to the nearest dollar as an answer to “Assignment Module 1 – Milestones” question 1b. You can have as many attempts at this as you wish, but this question will close at 4:00pm on Wednesday 18 August. There will be no marks available for this question part after then. NB You do NOT need to include your workings for this question in your submitted assignment paper.
c) Explain whether GreatOreCo should consider mine an attractive investment.
To compare the investment in the copper mine with other possible investments that GreatOreCo could make, management need to know the Internal Rate of Return (IRR) for the proposed copper mine. The IRR is the discount rate j1 for which the NPV of the project is zero. That is, the j1 rate for which PV(set up costs) = PV(operational profit contributions)
d) Derive and present the equation of equivalence that is appropriate for this scenario. Do NOT seek to simplify the expression. NB [Hint: Have expressions involving the 80 and the 20 on the left hand side, and expressions involving the 25’s and the 10 on the right hand side. This is a “Price is Right” type of problem].
e) Using an estimate of j1=18%, determine the value of the left hand side (costs) and the right hand side (profit contributions) of the equation of equivalence. Enter these two values to the nearest dollar as an answer to “Assignment Module 1 – Milestones” question 1e. You can have as many attempts at this as you wish, but this question will close at 4:00pm on Wednesday 18 August. There will be no marks available for this question part after then. NB You do NOT need to include your workings for this question in your submitted assignment paper.
f) Present your next three estimates of j1 and the corresponding value of the right hand side of the equation of equivalence. Ensure that for each of these three steps you explain why you increased or decreased the value of j1.
g) Determine a value of j1, for which the Left Hand Side (LHS) and Right hand Side (RHS) of the equation of equivalence vary by no more than $1000.00. NB You do not need to show any working for this question part, but merely present your answer, and the values of the RHS and LHS.
An alternative investment of roughly the same size as the copper mine would be to invest in a sand mining project in Iraq. This sand mining investment has been evaluated to have an internal rate of return of j1 = 22.5% p.a.
h) Assuming that GreatOreCo does not have access to sufficient funds to undertake both investments and must choose between them, explain which investment GreatOreCo should make. Identify and explain an additional consideration that might alter this decision.