Reference no: EM133061396

Due to the soaring demand for lithium batteries, North Inc. is considering an open-pit mining project that would extract lithium from sedimentary rock using sulfuric acid. At this location, boron is located along with the lithium and will also be mined. Your consulting firm has been hired by North Inc. to determine whether they should do the project.

North Inc. purchased the land five years ago for $15 million. The land was appraised last month and the company believes it would receive $20 million after-taxes if sold today. Local property taxes on the land are expected to remain at $300,000 a year. Local property taxes are a deductible expense for state and federal tax calculation. North Inc. plans to spend $5 million in federally mandated clean up costs on the property in year 6. North Inc. estimates that it will get $15 million after-tax selling the property on December 31 of year 7.

$31.5 million of equipment will be purchased at time 0 that will be depreciated on a 7-year MACRS schedule. MACRS rates for years 1 through 8: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, 4.46%. After five years the company believes the equipment can be sold for 10% of its initial price, however, the company plans to open another mine and will use the equipment there.

North Inc. has a five year contract to deliver 3,000 metric tons of lithium per year. The contract price per metric ton is $9,000 for years 1 and 2, $9,500 for years 3 and 4, and $9,700 for year 5. Variable costs per metric ton are $4,000 in year 1 and expected to grow at 5% a year after that. Additionally, boron is a byproduct of mining for lithium at this location and North Inc. has a five year contract to deliver 4,000 metric tons of boron per year. The contract price per metric ton is $800 for years 1 and 2, $750 for years 3 and 4, and $700 for year 5. Variable costs per metric ton are $400 in year 1 and expected to grow at 5% a year after that.

North Inc. estimates fixed costs of $3 million a year for year 1 and expect them to grow at 5% a year after that. Current assets of 4.0% of sales and current liabilities of 2.0% of sales are needed and incurred in the year before sales (i.e. current assets for time 0 is based on time 1 revenue, etc.).

Assume federal tax rate of 21% and a state rate of 4%. Assume the firm can have negative taxes in any given year. This assumption is so you do not have to calculated deferred taxes.

North Inc.'s cost of debt is 8.0%, its cost of equity is 12.0%, and its target D/V ratio is 25.0%

North Inc. wants your recommendation. Calculate NPV, IRR, and payback period of the project. In addition, President Joe Biden and the democrats controlling congress would like to raise