Question

Your mining company is considering an expansion of operations into iron ore. Your engineers surveyed a particular piece of land three weeks ago (the survey cost $45,000) and concluded the following:

• You can extract 2,500 tons of iron ore per year.
• There are 10,000 tons of iron ore underneath this land. Once all the ore has 
been extracted, the project will cease to produce any revenues.
• The price of ore will remain constant for the next 4 years. Currently ore sells 
for $120 per ton.
• The operating cost to extract the ore will be $80 per ton for the next 4 years.
• We can invest in the equipment for this project right now for $100,000.
• The equipment will be fully depreciated over a period of four years using the 
straight-line method.
• At the end of year 4, we can sell the equipment involved in the project for 
$25,000
• The expansion requires additional working capital (NWC) of $15,000 from 
the start (at time t=0) until the end of year 4. At time t=4, working capital 
decreases to $0.
• The tax rate is assumed to be 35%. Your cost of capital is 11%.

Please provide the Free Cash Flow for each year of this project (times t=0 through t=4) and compute the project’s NPV.

(Enter the full dollar amount for each cash flow/NPV. Round your answer to the nearest dollar. For example, a cash flow of $273,610.68 would be entered as 273611. Negative values should be entered appropriately using the "-" symbol before the dollar amount.)

T = 0 Cash Flow:

T = 1 Cash Flow:

T = 2 Cash Flow:

T = 3 Cash Flow:

T = 4 Cash Flow:

Project NPV:

Answer 1

Working Notes:

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization.

Depreciation = $100,000 / 4 = $25,000 (It will added back because it is not a cash expense)

After Tax Cash flow from sale of equipment = Sale price ( 1 - Tax Rate)

= $25,000 (1-0.35)

= $16,250

Discount Factor Formula:

Where,
i = discount rate
n = number of periods