CSC is a mining firm based in Western Australia. One of its core activities is t
ID: 2727114 • Letter: C
Question
CSC is a mining firm based in Western Australia. One of its core activities is to develop mine fields. Currently, it is considering a project to develop a mine field in the Gibson Desert. The success of this project is largely dependent on the economy of China, where most of CSC’s ores are exported to. According to market research that CSC paid $200,000 for, the project will require an investment of $2,000,000 for extraction rights and the necessary equipment. It also shows that the project has 60% of succeeding, in which case CSC will get an annual net cash flow of $850,000 for ten years. If the project fails, CSC will get only $20,000 in the first two years and nothing after that because of the closure of the mine. CSC requires a 10 percent real return on projects of this type. What is the NPV of the project? All cash flows are expressed in real terms.
A) 1290597 B) 1147614 C) 1829061 D)1734002
Explanation / Answer
Success Case (p=60%)
Year
Cash Flow
PV Factor@ 10%
PV
0
(2,000,000)
1.0000
(2,000,000.00)
1
850,000
0.9091
772,727.27
2
850,000
0.8264
702,479.34
3
850,000
0.7513
638,617.58
4
850,000
0.6830
580,561.44
5
850,000
0.6209
527,783.12
6
850,000
0.5645
479,802.84
7
850,000
0.5132
436,184.40
8
850,000
0.4665
396,531.27
9
850,000
0.4241
360,482.98
10
850,000
0.3855
327,711.80
NPV
3,222,882.04
Failure Case (p=40%)
Year
Cash Flow
PV Factor@ 10%
PV
0
(2,000,000)
1.0000
(2,000,000.00)
1
20,000
0.9091
18,181.82
2
20,000
0.8264
16,528.93
NPV
(1,965,289.26)
Expected NPV of the Project =[0.6 x $ ]+[0.4 x - $ ]
=[0.6 x 3,222,882.04 ]+[0.4 x - $ 1,965,289.26]
= 1,933,729.22 + - $ 786,115.70
=$1,147,614
Option B correct
Success Case (p=60%)
Year
Cash Flow
PV Factor@ 10%
PV
0
(2,000,000)
1.0000
(2,000,000.00)
1
850,000
0.9091
772,727.27
2
850,000
0.8264
702,479.34
3
850,000
0.7513
638,617.58
4
850,000
0.6830
580,561.44
5
850,000
0.6209
527,783.12
6
850,000
0.5645
479,802.84
7
850,000
0.5132
436,184.40
8
850,000
0.4665
396,531.27
9
850,000
0.4241
360,482.98
10
850,000
0.3855
327,711.80
NPV
3,222,882.04