Merafe Mining6.png - 1.9 Assume that EY is confident of its estimates of all the variables that affect the project's cash flows except unit sales and

Merafe Mining6.png - 1.9 Assume that EY is confident of its...

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Unformatted text preview: 1.9. Assume that EY is confident of its estimates of all the variables that affect the project's cash flows except unit sales and sales price. Scenario Analysis Squared Deviation Scenario Probability Unit Sales Unit Price NPV times probability Best Case 25% 1600 240 278964.661 7862111359 Base Case 50% 1250 200 88029.7316 92450542.34 Worst Case 25% 900 160 -48513.8624 5635612088 Expected NPV = $1,01,628 Standard Deviation = $75,684 Coefficient of Variation = Std Dev / Expected NPV = 0.74 1.10. Assume that Merafe's average project has a coefficient of variation in the range of 0.2 to 0.4. Would the new line be classified as high risk, average risk, or low risk? 1.11. Merafe typically adds or subtracts 3 percentage points to the overall cost of capital to adjust for risk. Should the new line be accepted? Cost of capital for average projects: 10% Adjustment for risky projects: 3% Risk adjusted cost of capital: 13% NPV with risk adjusted cost of capital: $65,371 (See the +30% WACC in the sensitivity analysis above.)...
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