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Capital Budgeting
Financial Analysis of a Mineral Resources Opportunity on the North Ridge of Mt. Zircon
Situation Overview
Engineers working for Peru Resources have proposed a new mine on the North Ridge of Mt. Zircon. They have discovered a vein of transcendental zirconium ore that led them to believe that there was a sufficient amount to produce roughly 340 tons of this mineral per year for a seven-year period. Furthermore, it was believed that this vein may also contain hydrated zircon gemstones however this mineral resource is more difficult to predict beforehand and a conservative estimate of one hundred fifty pounds of this mineral could be sourced from this site on an annual basis.
The current market price for transcendental zirconium is ten thousand dollars per ton while the current price of hydrated zircon gemstones is three thousand three hundred dollars per pound. However, these prices are heavily dependent on the international market for these raw materials and as a result the prices may fluctuate significantly. That being the case, Maxine Peru, the company's CEO expects the market prices to remain at roughly the same levels; although the price will undoubtedly at least rise by the price of inflation.
The cost of constructing the necessary equipment and hardware at the site to extract the minerals has been identified in the neighborhood of ten million dollars. However, once again, there is also variability in estimating such expenses and it is not uncommon for such projects to go over budget by ten or fifteen percent. Furthermore, there also environmental regulations that are on the books and if these regulations are enacted it could also add a million and a half dollars to the cost of mining the site. Given all of the variables that are subject to change, a detailed and thorough financial analysis must account for potential fluctuation in these estimates.
Financial Analysis
Revenue Potential
Zirconium Tons per Year
1
2
3
4
5
6
7
Sum
Quantity
Expected Price per Ton
$10,000.00
$10,300.00
$10,609.00
$10,927.27
$11,255.09
$11,592.74
$11,940.52
$76,624.62
Revenues at Expected
$3,400,000.00
$3,502,000.00
$3,607,060.00
$3,715,271.80
$3,826,729.95
$3,941,531.85
$4,059,777.81
$26,052,371.41
Low Price per Ton
$7,500.00
$7,725.00
$7,956.75
$8,195.45
$8,441.32
$8,694.56
$8,955.39
$57,468.47
Revenues at Low
$2,550,000.00
$2,626,500.00
$2,705,295.00
$2,786,453.85
$2,870,047.47
$2,956,148.89
$3,044,833.36
$19,539,278.56
High Price
$14,000.00
$14,420.00
$14,852.60
$15,298.18
$15,757.12
$16,229.84
$16,716.73
$107,274.47
Revenues at High Price
$4,760,000.00
$4,902,800.00
$5,049,884.00
$5,201,380.52
$5,357,421.94
$5,518,144.59
$5,683,688.93
$36,473,319.98
Hydrated Zircon Gemstones
1
2
3
4
5
6
7
Sum
Quantity in Pounds
Expected Market Price
$3,300.00
$3,399.00
$3,500.97
$3,606.00
$3,714.18
$3,825.60
$3,940.37
Expected Revenues
$495,000.00
$509,850.00
$525,145.50
$540,899.87
$557,126.86
$573,840.67
$591,055.89
$3,792,918.78
Two Veins in Pounds
$300.00
$300.00
$300.00
$300.00
$300.00
$300.00
$300.00
Two Vein Revenue
$990,000.00
$1,019,700.00
$1,050,291.00
$1,081,799.73
$1,114,253.72
$1,147,681.33
$1,182,111.77
$7,585,837.56
A Dozen Veins
$1,800.00
$1,800.00
$1,800.00
$1,800.00
$1,800.00
$1,800.00
$1,800.00
Dozen Vein Revenue
$5,940,000.00
$6,118,200.00
$6,301,746.00
$6,490,798.38
$6,685,522.33
$6,886,088.00
$7,092,670.64
$45,515,025.35
Total Expected Revenue
1
2
3
4
5
6
7
Sum
Revenues at Expected
$3,400,000.00
$3,502,000.00
$3,607,060.00
$3,715,271.80
$3,826,729.95
$3,941,531.85
$4,059,777.81
$26,052,371.41
Expected Revenues
$495,000.00
$509,850.00
$525,145.50
$540,899.87
$557,126.86
$573,840.67
$591,055.89
$3,792,918.78
Sum
$3,895,000.00
$4,011,850.00
$4,132,205.50
$4,256,171.67
$4,383,856.81
$4,515,372.52
$4,650,833.69
$29,845,290.19
Expenses
Expenses
1
2
3
4
5
6
7
Sum
Initial Investment
$10,000,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$10,000,000.00
Fixed Costs
$400,000.00
$400,000.00
$400,000.00
$400,000.00
$400,000.00
$400,000.00
$400,000.00
$2,800,000.00
Variable Costs
$500,000.00
$500,000.00
$500,000.00
$500,000.00
$500,000.00
$500,000.00
$500,000.00
$3,500,000.00
Total
$10,900,000.00
$900,000.00
$900,000.00
$900,000.00
$900,000.00
$900,000.00
$900,000.00
$16,300,000.00
Cash flow Projection
Cash flow
1
2
3
4
5
6
7
-$7,005,000.00
$3,111,850.00
$3,232,205.50
$3,356,171.67
$3,483,856.81
$3,615,372.52
$3,750,833.69
% Cost of Capital
Cash flow
1
2
3
4
5
6
7
-$7,005,000.00
$3,111,850.00
$3,232,205.50
$3,356,171.67
$3,483,856.81
$3,615,372.52
$3,750,833.69
NPV
$5,373,994.66
IRR
Cash flow
1
2
3
4
5
6
7
-$7,005,000.00
$3,111,850.00
$3,232,205.50
$3,356,171.67
$3,483,856.81
$3,615,372.52
$3,750,833.69
IRR
41%
Break Even
Cash flow
1
2
3
4
5
6
7
-$7,005,000.00
$3,111,850.00
$3,232,205.50
$3,356,171.67
$3,483,856.81
$3,615,372.52
$3,750,833.69
Break Even
-$7,005,000.00
-$3,893,150.00
-$660,944.50
$2,695,227.17
Best Case
Best Case
1
2
3
4
5
6
7
Revenues at High Price
4760000
4902800
5049884
5201380.52
5357421.936
5518144.594
5683688.931
36473319.98
Dozen Vein Revenue
5940000
6118200
6301746
6490798.38
6685522.331
6886088.001
7092670.641
45515025.35
Expenses
10900000
900000
900000
900000
900000
900000
900000
16300000
Cashflow
-200000
10121000
10451630
10792178.9
11142944.27
11504232.6
11876359.57
65688345.33
NPV
$36,831,437.32
IRR
Worst Case
Wost Case
Revenues at Low
2550000
2626500
2705295
2786453.85
2870047.466
2956148.889
3044833.356
19539278.56
Initial Investment
1
0
0
0
0
0
0
1
Fixed Costs
400000
400000
400000
400000
400000
400000
400000
2800000
Variable Costs
500000
500000
500000
500000
500000
500000
500000
3500000
Environmental Regs.
1500000
Cost Overrun
150000
Cashflow
-1
1726500
1805295
1886453.85
1970047.466
2056148.889
2144833.356
3239278.561
NPV
($1,155,340.73)
IRR
4%
Discussion
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