1) A mine can yield= 16,000 ounces of silver at variable cost of= $36 per ounce. Fixed costs of operating mine are= $48,000 per year. In half years, silver can be sold for= $52 per ounce; in other years, silver can be sold for only= $26 per ounce. Ignore taxes.
a) Determine the average cash flow you will get from mine if it is forever kept in operation and silver always is sold in year it is mined?
b) Now assume you can shut down mine in years of low silver prices. Compute average cash flow from mine.
2) Though, you identify that some of these estimates are subject to error. Assume that each variable may turn out to be either 10% higher or 10% lower than initial estimate. Project will last for ten years and needs the initial investment of= $1.4 million, which will be declined straight-line over project life to final value of zero. Firm’s tax rate is= 40% and required rate of return is 14%.
a) Determine project NPV in “best-case scenario,” i.e., suppose all variables take on best possible value?
b) Determine project NPV in the worst-case scenario?