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# South American Mining Suppose that a mining operation has spent \$8 million Answer

South American Mining Suppose that a mining operation has spent \$8 million Answer

South American Mining Suppose that a mining operation has spent \$8 million Answer

Problem 1)

South American Mining Suppose that a mining operation has spent \$8 million developing an ore deposit in South America. Current expectations are that the deposit will require 2 years of development and will result
in a realizable cash flow of \$10 million at that time. The company engineer has discovered a new way of extracting the ore in only 1 year, but the procedure would necessitate an immediate outlay of \$1 million. Required: 1. Compute the IRR for the new outlay.
(Note: There are two solutions! One is 787%. Find the other one.) 2. Based on your answer to (a), use the IRR criterion to determine if the company should make the outlay.
Assume the market interest rate is 15% on 1- and 2-year bonds.

Problem 2)

Toledo Stadium The city of Toledo has received a proposal to build a new multipurpose outdoor sports stadium. The expected life of the stadium is 20 years. It will be financed by a 20-year bond paying 8% interest annually. The stadium’s
primary tenant will be the city’s Triple-A baseball team, the Red Hots. The plan’s backers anticipate that the site also will be used for rock concerts and college and high school sports. The city does not pay any taxes. The city’s cost of capital is 8%. The
costs and estimated revenues are presented below. Cash outflow: Construction cost \$12,000,000 General maintenance including labor \$250,000 per year Cash inflow Red hot lease payments \$650,000 per year Concert \$ 600,000 per year College and high school \$ 50,000
per year

Required: 1. Should the city build the stadium? (Assume payments are made at the end of the year.) 2. The Red Hots have threatened to move out of Toledo if they do not get a new stadium. The city comptroller estimates that the move will cost the city \$350,000 per year for 10 years in lost taxes, parking, and other fees. Should the city build the stadium now? State your reasoning.

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