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A company want you to use rate of return analysis to evaluate the economics of buying the mineral rights to a mineral reserve for a cost of $1,500,000 at year 0 with the expectation that mineral development costs of $5M and tangible equipment costs of $4M will be spent at year 1. The mineral reserves are estimated to be produced uniformly over 8 year production life (evaluation years 2 through 9). Since escalation of operating costs each year is estimated to be off-set by escalation of revenues, it is projected that profit will be constant at $4M per year in each of evaluation years 2 through 9. find out the project rate of return, then assume a 15% minimum rate of return and find out the project growth rate of return, NPV and PVR.

The answers are NPV = +7.99; PVR = 0.86, but I need to know how to get the answers, its a self study.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M937478

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