Question

In: Accounting

Option 1: Building a new refinery The construction and installation of a new refinery will cost...

Option 1: Building a new refinery

The construction and installation of a new refinery will cost $22 million. In addition, a processing plant will also need to be constructed at a cost $6 million. This plant will need to be supplied with grinding machines, DMS flotation machines and other equipment at a total cost of $16 million. Kidman Resources’ current fleet of Haul trucks, water carts and dump trucks will meet the needs for this project, however until recently, the fleet has been earning a rental income of $120,000 per year.

Under the agreement with Tesla inc., the lithium mined is expected to generate a revenue of $15 million per year, which will increase by 2.8% per annum adjusted for rising costs. Due to the additional complexities involved with the construction and management of this new refinery, 5 new engineers (yearly salary per engineer $160,000) will replace 5 existing engineers (yearly salary per engineer $120,000). All other remaining labour force required is expected to cost $3 million per annum for the duration of the project.


For tax reasons you will expense the cost of the processing plant immediately. The cost for the construction and installation of the new refinery and associated machines and equipment will be depreciated over three years using the straight-line method. Due to the nature of the mining project, the machines and equipment will likely have a salvage value of $10 million at the end of three years. Finally, the required net working capital is $2 million.

Option 2: Outsourcing the supply of ore

Alternatively, Kidman Resources can contract BHP to supply the required ore to process into lithium hydroxide. Based on the required amount of lithium hydroxide, management has quoted a total cost of $28 million. BHP has however offered this rate on the condition that Kidman Resources pays 20% of the total cost in advance in the beginning of the year, with the remaining paid in equal instalments thereafter. Kidman Resources will process the ore into lithium hydroxide using existing facilities at an expected cost of $4.4 million per year.

Calculate NPV for option 1 and 2. Tax rate= 28%, discount rate= 10%

Solutions

Expert Solution


Related Solutions

Option 1: Building a new refinery The construction and installation of a new refinery will cost...
Option 1: Building a new refinery The construction and installation of a new refinery will cost $22 million. In addition, a processing plant will also need to be constructed at a cost $6 million. This plant will need to be supplied with grinding machines, DMS flotation machines and other equipment at a total cost of $16 million. Kidman Resources’ current fleet of Haul trucks, water carts and dump trucks will meet the needs for this project, however until recently, the...
Question: Building a new refinery The construction and installation of a new refinery will cost $22...
Question: Building a new refinery The construction and installation of a new refinery will cost $22 million. In addition, a processing plant will also need to be constructed at a cost $6 million. This plant will need to be supplied with grinding machines, DMS flotation machines and other equipment at a total cost of $16 million. Kidman Resources' current fleet of Haul trucks, water carts and dump trucks will meet the needs for this project, however until recently, the fleet...
Option 1: In-house production The purchase and installation of the machinery shall cost $3,500,000 and has...
Option 1: In-house production The purchase and installation of the machinery shall cost $3,500,000 and has an economic life of twelve years. The machinery is expected to depreciate to zero on a straight-line basis over its economic life. However, the company expects to keep their in-house production for only seven years. At the end of Year 7, the machinery can be sold at an estimated market value of $1,700,000. Currently YDL has a warehouse which generates a rental income of...
Construction of a new building began on April 1 and was completed on October 29. Construction...
Construction of a new building began on April 1 and was completed on October 29. Construction expenditures were as follows: May 1 $3,300,000 July 30 2,200,000 September 1 1,740,000 October 1 2,640,000 MMI borrowed $5,000,000 at 6% on April 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $6,650,000, 8% long-term note payable outstanding throughout 2021. Weighted Average Accumulated Expenditures were: [Round expenditure to nearest dollar] Date Expenditure Months financed...
Construction of a new building began on April 1 and was completed on October 29. Construction...
Construction of a new building began on April 1 and was completed on October 29. Construction expenditures were as follows: May 1 $3,300,000 July 30 2,200,000 September 1 1,740,000 October 1 2,640,000 MMI borrowed $5,000,000 at 6% on April 1 to help finance construction. This loan, plus interest, will be paid in 2022. The company also had a $6,650,000, 8% long-term note payable outstanding throughout 2021. Weighted Average Accumulated Expenditures were: [Round expenditure to nearest dollar] Date Expenditure Months financed...
UVW began construction of a new office building on March 1, Y1. On the day construction...
UVW began construction of a new office building on March 1, Y1. On the day construction began, UVW borrowed $240,000 at 7% and immediately spent it on the project. An additional payment of $60,000 was also made on the day construction began. Additional expenditures of $75,000 were made on May 1 and August 31. Construction was complete and the building was placed in service on December 31, Y1. In addition to the $240,000 borrowed to finance the project, UVW also...
You are the project manager responsible for a new building construction in northern Virginia. The building...
You are the project manager responsible for a new building construction in northern Virginia. The building is worth $500,000 and will have five bedrooms, a kitchen, landscaping, and a two-car garage to be completed in two years. This was agreed upon in a firm fixed contract. During the execution (construction) of the building, you realize that the cost of materials have gone up by 10%, and your schedule is behind by 90 days due to delays from county inspections and...
On March 1, 2020, Reed hired a contractor to construct a new office building. The construction...
On March 1, 2020, Reed hired a contractor to construct a new office building. The construction work commenced on April 1, 2020, and it is expected to continue through July 31, 2022, the estimated completion date. Reed made progress payments to the contractor in 2020 as follows: Date Amount April 1 $ 48,000 June 1 195,000 September 1 322,000 November 1 67,000 $632,000 As stated in A5 above, Reed took a 1-year, 9%, $225,000 construction loan to help fund the...
On January 1, 2015 Costco began construction of a new warehouse in Redmond, WA. The building...
On January 1, 2015 Costco began construction of a new warehouse in Redmond, WA. The building was completed on June 30, 2016. Cash outlays for the $5 million project were as follows: 2015 January 1                        $1,000,000 March 1                          $600,000 June 30                           $800,000 September 30               $750,000 December 1                   $600,000 2016 March 31                        $800,000 June 30                           $450,000 (final payment) Total payments             $5,000,000 On January 1, 2015 Costco obtained a $3 million dollar construction loan with a 5% interest rate. Costco’s other long-term...
On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished...
On January 1, 2021, Dreamworld Co. began construction of a new warehouse. The building was finished and ready for use on September 30, 2022. Expenditures on the project were as follows: January 1, 2021 $ 326,000 September 1, 2021 $ 477,000 December 31, 2021 $ 477,000 March 31, 2022 $ 477,000 September 30, 2022 $ 326,000 Dreamworld had $5,900,000 in 12% bonds outstanding through both years. What was the final cost of Dreamworld's warehouse?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT