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The Winderl Mining Co. paid $50 million for the right to explore and extract copper from land owned by the state of Wyoming. To obtain the rights, Winderl agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. Winderl incurred exploration and development costs of $15 million on the project.

The company's credit-adjusted risk free interest rate is 6%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows:

Cash outflow Probability
$ 5 million 40%
$10 million 60%

What is the initial cost of the copper mine?

Respuesta :

jepessoa

Answer:

$71,716,960

Explanation:

The total initial cost of the copper mine = $50 million paid for exploration and extraction rights of the land + $15 million in exploration and development costs + restoration costs ???

restoration costs = expected monetary value x PV factor

EMV = ($5 million x 40%) + ($10 million x 60$) = $2 million + $6 million = $8 million

PV factor (i = 6%, n = 3) = 0.83962

restoration costs = $8 million x 0.83962 = $6,716,960

Total initial cost of the mine = $50,000,000 + $15,000,000 + $6,716,960 = $71,716,960