A mining company has already located an economically viable copper deposit and i

Question

A mining company has already located an economically viable copper deposit and is re-assessing the after-tax cash flows and economics as they enter development. The project involves the costs and production characteristics summarized in the table below. Calculate the after-tax cash flow (ATCF) for this centure. Assume a 6-month deduction for all amortizable costs begins in the year such costs are incurred. Assume all equipment and infrastructure costs will be depreciated based on the MACRS 7-year schedule assuming the half-year convention. Start all depreciation at the end of year 1 when all assets are assumed to be in a condition or state of readiness and available for service. Assume a 3.0% royalty (tax) on the gross revenue for the mine each year. To simplify this analysis, write off all remaining book values against the assumed sale value of $2 billion at the end of year 4 and assume any gain will be taxes as ordinary income. Other income exists against which to use all deductions in teh year incurred. Assume a 35% Federal income tax rate and a 5.0% state income tax that is deductible for computing Federal taxable income. This project is in the United States and the investor is seeking a 15% after-tax minimum rate of return.

Note: Annual revenue is calculated on the net pounds of refined copper each year which is based on (annual tonnage) x (pounds per tonne) x (average grade) x (solvent extraction recovery rate). "M" represents millions and tonnes are metric measures with equvalent pounds per tonne summarized below.

Variation on Auxilary Problem 8-7A, M=1,000,000, t=Metric Tonne

Calculate the after-tax cash flows (ATCF's) for the project and corresponding ROR and NPV.

Year 0 1 2 3 4 Production Tonnes of Ore in M 10.00 17.00 17.00 17.00 Reserves @ Beginning of Year in M 200.00 190.00 173.00 156.00 139.00 Pounds Per Tonne 2,204.62 2,204.62 2,204.62 2,204.62 Average Grade 0.015 0.015 0.015 0.015 Solvent Extraction Recovery 0.990 0.990 0.990 0.990 Cu Price @ Per Pound $2.00 $2.00 $2.00 $2.00 Operating Costs. $ per Tonne of Ore $16.00 $16.00 $16.00 $16.00 Project Sale Value in M$ $2,000.00 Capital Investment in M$ Mine Acquisition 50 Mine Development 250 Mine Equipment 900 400 Infrastructure 25 40 Working Capital 20 30

Explanation / Answer

Calculation of NPV:

Year 0 Year 1 Year 2 Year 3 Year 4 Production 10 17 17 17 Beginning reserves 200 190 173 156 139 pounds per tonne 2204.62 2204.62 2204.62 2204.62 Average grade 0.015 0.015 0.015 0.015 Solvent extraction recovery 0.99 0.99 0.99 0.99 Net pounds of refined copper 327.3861 556.5563 556.5563 556.5563 (using the formula given) Price per pound 2 2 2 2 Revenue = price*punds of refined copper 654.7721 1113.113 1113.113 1113.113 Royalty @3% -19.6432 -33.3934 -33.3934 -33.3934 Operating cost -160 -272 -272 -272 Project sale value 2000 Ammortization of capital costs Mine acquisition -5.55556 -11.11 -11.11 -11.11 -11.11 Mine development -27.7778 -105.55 -105.55 -105.55 -105.55 Mine equipment $900 -180 -180 -180 -180 -180 Mine equipment $400 -100 -100 -100 -100 Infrastructure $25 -5 -5 -5 -5 -5 Infrastructure $40 -10 -10 -10 -10 Working capital $20 -2.22222 -4.445 -4.445 -4.445 -4.445 Working capital $30 -7.5 -7.5 -7.5 -7.5 Net flow -220.556 51.52398 384.1143 384.1143 2384.114 Federal tax amount -18.0334 -134.44 -134.44 -834.44 State income tax -2.5762 -19.2057 -19.2057 -119.206 After tax cash flow -220.556 30.91439 230.4686 230.4686 1430.469

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.