Question

A copper mine of limited reserve, 1,500,000 tons contains 4% copper. Production is 1000 tpd on a 5 day week. Production is 50% the first year and 75% the second year. Mining costs and processing costs average $50 per ton. Federal and state taxes are 36%. Depletion allowance is 15%. Copper is 90 cents per pound and the price is stable. Sellers get 1,000,000 now and 1,000,000 at the start of the second and first years. They also receive a 5% royalty on the copper produced at the refinery. Depreciation is on a unit production rate. The refinery at the end of the term is worth 60% of the original net cost. The company operates on a 25% rate of return. Should they invest?

The question of whether or not I should invest in the project according to the data

tpd means ton per day

1000000 in dollars

this is my solution

Answer 1

Since the main life stands at 6years and 9 months, and rate if return is well above 15 percent average with 60 percent net worth of cost, we must recommend to invest in this refinery.

Since its value buying as CAGR growth is phenomenal and over years free operating cash flow is higher with high margin of safety as intrinsic value is higher than its original value.