Suppose that you are considering developing a new copper mine. The project will have costs and benefits that occur according to the following schedule:
Construction costs:
Today: $500 million
Revenues: One year from today: $100 million
Two years from today: $100 million
Three years from today: $200 million
Four years from today: $200 million
Cleanup costs:
Five years from today: $50 million
Assume that the costs and benefits occur at one point in each year (e.g., on 11/1/17, 11/1/18, 11/1/19, etc.). Suppose that the interest rate is 5%.
a. Calculate the present value of the costs and benefits of the project.
b. Should you undertake the project? Explain.
c. Suppose you decide to go ahead with the project. On 11/2/19, Rio Tinto offers to buy your mine. When deciding how much you should ask for payment for the project, which costs and benefits should you consider? Explain.