SOAFAP2Mod1Exercise01-03ModelSolution.pdf - Model Solution...

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© 2003 - 2009 Society of Actuaries | SOAFAP2Mod1Exercise01-03ModelSolution.doc | Page 1 Model Solution for Module 1 Exercise: Can-Do Mining How Did You Do? On the following pages and accompanying Excel spreadsheet you’ll find a model solution to the exercise you just completed. Spend at least 30 minutes comparing your deliverables to this solution. Pay particular attention to the footnotes as they will help show how the model solution addresses B. Wilder’s questions and issues. The footnotes also explain how the requisite sections of the memorandum (i.e., Executive Summary, Introduction, etc.) have been integrated into the model solution. Consider the criteria below as you compare your results to the attached. Does Not Meet Minimum Requirements Either doesn’t recommend—or recommends but fails to justify—a walk-away point. Conducts some but not all of the sensitivity tests requested. Identifies additional risks in a fuzzy manner, which minimizes their significance. Is poorly organized. Meets Minimum Requirements Recommends a walk-away point, offering some justification for why it is the appropriate walk-away point. Calculates the inflation rate that is equivalent to the 15% contingency allowance. Conducts all sensitivity tests requested. Identifies additional risks such as the budget variances between 2005 and 2006. Answers all questions / addresses all issues presented. Is well-organized. Incidentally, to have exceeded minimum requirements you will have met the minimum requirements plus you might have: Conducted additional sensitivity tests. Identified key risks about which Wilder and Can-Do should be most concerned. Recommended strategies to address all key risks identified. How did you do? Once you’ve compared your results to the following pages, return to the Fundamentals of Actuarial Practice course and complete the self-assessment.
© 2003 - 2009 Society of Actuaries | SOAFAP2Mod1Exercise01-03ModelSolution.doc | Page 2 Memorandum From: B. Wilder VP, Mergers and Acquisitions, Can-Do Re: South Face Mine Date: December 11, 2005 Executive Summary 1 Mountain Mining Canada Ltd. (MMCL) is closing its South Face Mine. Due to its strategic location, Can-Do is interested in purchasing this mine. As Can-Do considers its negotiating strategy for purchasing the South Face Mine, it plans to set a “walk-away point.” That is, it wants to determine at the outset the maximum amount it will agree to pay to MMCL for the South Face Mine. If MMCL demands more, then Can-Do will walk away from the deal. The purpose of this memorandum is to recommend Can-Do’s walk-away point. 2 Using budget data provided by MMCL and a simple discounted cash flow model, I have estimated and sensitivity tested the value of the South Face Mine to Can-Do. 3 Based upon MMCL’s budget data and assuming inflation of 3% and a discount rate of 6%, the value of the South Face Mine to Can-Do is $15 million, so Can-Do’s walk-away point should be no more than $15 million. 4

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