Marcal Corporation is considering a gold mining project would cost $15 million today and generate positive cash flows

Question

Marcal Corporation is considering a gold mining project would cost $15 million today and generate positive cash flows of $6 million a year at the end of each of the next 4 years. The project's cost of capital is 12%. a. Calculate the project's NPV if the company proceeds now. b. The company is fairly confident about its cash flow forecast, but expects to have better price information in 1 year. The company believes the cost would be $18 million in 1 year. It estimates there is a 60% change CFs will be $9 million for 4 years and a 40% change CFs will be $5 million for 4 years. Should the company proceed with the project now or wait 1 year until it has better information? c. Apart from the calculations above, discuss 3 qualitative factors that the company should consider when making its decision on accepting the new

Help In Homework · Accepted Answer

Cost= $15 million Cash flow= $6 million Cost of capital= 12% No. of period= 4 a.) NPV = -15 + 6/1.12 +6/1.12^2 +6/1.12^3 +6/1.12^4 = 3.22 Million b.) Cost= $18 million No. of period= 4 Cash flow= $9 million Change in cash flow= 60% Cash flow = $5 million Change in cash flow= 40% Positive cash flow estimate for 4 years = 0.6*9 +0.4*5 = 7.4 Million NPV 1 year from today = -18 + 7.4/1.12 + 7.4/1.12^2 +7.4/1.12^3 + 7.4/1.12^4 = 4.4764 Million NPV today = 4.4764/1.12 = 3.9968 Million or 4 million The company should wait for 1 year because the NPV of waiting for 1 year is greater. c.) Quantitative factors; Higher initial investment Higher future cash flows Greater foresight in future cash flow

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Marcal Corporation is considering a gold mining project would cost $15 million today and generate positive cash flows of $6 million a year at the end of each of the next 4 years

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