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

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.

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