+1-415-670-9189
info@expertsmind.com

# Get Solution

Find the price of molybdenum
Course:- Corporate Finance
Reference No.:- EM131134210

 Tweet

Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Corporate Finance

EXERCISE: Valuing a gas pipeline

You own a gas pipeline that requires no maintenance and will produce \$2 million of revenue next year. Unfortunately, after the first year the volume of gas (and thus the revenue) is expected to decline by 4.0% per year.

a. If the discount rate is 11.0% and the pipeline lasts forever, what is it worth today?

b. If the discount rate is still 11.0%, but pipeline is to be abandoned at the end of 20 years, what is it worth today?

EXERCISE: Expanding capacity in molybdenum mines

Question:

AMAX Corporation is a mining company that focuses on extraction of molybdenum-a crucial additive in the production of steel. AMAX is considering expanding its molybdenum capacity and is deciding whether to pursue one of the following investment alternatives:

a) An investment to expand capacity at its Climax mine would cost \$100M today (year 0), \$50M next year (year 1) and would increase capacity in years 3 to 9 by 15M pounds (note there is no cash flow in year 2).

The variable cost of extracting molybdenum at this location would be \$4/pound.

[Hint: nominal annual profits from the increased capacity would therefore be given by 15M x (P - \$4), where P is the price of molybdenum]

 Year 0 1 2 3 4 5 6 7 8 9 Investment (in \$M) -           100 -          50

b) An investment to expand capacity at its Henderson mine would cost \$75M today (year 0), \$30M next year (year 1) and would increase capacity by 13M pound per year from years 3 to 9. The variable costs of extracting molybdenum from this location would be \$4.5/pound.

 Year 0 1 2 3 4 5 6 7 8 9 Investment (in \$M) -             75 -          30

c) Reopening of its Kitsault mine would require an investment of \$25M today (year 0), \$10M in year 1 and \$10M in year 2 and would increase capacity in years 3 to 9 by 10M pounds. The variable cost of extraction would be \$6/pound.

 Year 0 1 2 3 4 5 6 7 8 9 Investment (in \$M) -             25 -          10 -          10

If the discount rate is 16%, find the price of molybdenum above which it makes sense to do each of the investments a), b), and c).

Attachment:- financial acumen.rar

Minimize