Question

the company is confident that it can sustain mining activities for a period of 20 years (project life). The company has spent $50 million in exploration and trial drilling since the discovery, and also has spent another $180 million developing an open cut mine, which commenced operating in 2019. The mined material is being sold to other companies for treatment and ultimate sale to largely international customers. Based on its recent experience with this arrangement, Peterborough Mines is considering constructing its own separation and refining plant to treat all the mined material and extract the lithium salts electrolytically from a mixture of lithium chloride and potassium chloride. The plant would take a year to construct and would have an engineering life of 10 years, and the company has estimated that the incremental cash flow from the plant will be $40 million annually after tax.

The company estimates that it will have to spend $60 million before tax when the plant refining operations cease to remove the plant and make safe a considerable amount of
stored toxic materials.

Cost of capital is 14%.

a) What is the maximum capital that the company should outlay on building the plant?

Answer 1

The maximum capital investment for the project simply calculate as present value of all the cash inflow associated with the project.

Year	1	2	3	4	5	6	7	8	9	10	11
Cash inflow	0	40	40	40	40	40	40	40	40	40	40
Cash outflow											-60
Net cash flow	0	40	40	40	40	40	40	40	40	40	-20
Cost of capital	14%
PV (Net cash flow)	0	30.7787	26.99886	23.68321	20.77475	18.22346	15.98549	14.02236	12.30032	10.78975	-4.73235
Total Cash flow	168.8246	Maximum capital