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10-4sol - PROBLEM 10-4 Given Initial investment Total Ore...

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PROBLEM 10-4 Given Initial investment $60,000,000 Total Ore Quantity 75,000 tons % Pure Copper/ton 15% Life of project 5 years Ore mined each year 15,000 tons Cost/ton for processing $150.00 Tax rate 30% Risk free rate 5.5% WACC 9.5% Growth in copper prices 12% Forward Price Curve Copper Price/Ton 2008 $7,000 $7,000 2009 7,150 7,840 2010 7,200 8,781 2011 7,300 9,834 2012 7,450 11,015 Solution a. Year Revenues NOI 2008 $15,750,000 $(2,250,000) $(12,000,000) $1,500,000 2009 16,087,500 (2,250,000) (12,000,000) 1,837,500 2010 16,200,000 (2,250,000) (12,000,000) 1,950,000 2011 16,425,000 (2,250,000) (12,000,000) 2,175,000 2012 16,762,500 (2,250,000) (12,000,000) 2,512,500 b. NPV $(2,868,571.02) c. Year Revenues NOI 2008 $15,750,000 $(2,250,000) $(12,000,000) $1,500,000 2009 17,640,000 (2,250,000) (12,000,000) 3,390,000 2010 19,756,800 (2,250,000) (12,000,000) 5,506,800 2011 22,127,616 (2,250,000) (12,000,000) 7,877,616 2012 24,782,930 (2,250,000) (12,000,000) 10,532,930 NPV $469,703.34 Expected Prices per Ton Processing Costs Depreciation/ Depletion Processing Costs Depreciation/ Depletion The analyst should construct a tracking portfolio (that tracks the cash flows as expected by the CFO) Since th the correct procedure used by the analyst), the tracking portfolio should be a cheaper.
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Tracking portfolio Year Forward price Expected Price Gain (loss) on FOR Bond Payoffs 2008 $7,000 $7,000 $- $13,050,000 2009 7,150 7,840 1,552,500 12,820,500 2010 7,200
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