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.
