Capital Budget Essay

P wage c every(prenominal) your recomm restations, based on (a) (b) (c) (d) the payback period of time method the IRR method the pro? tability index number method and the NPV method. 3. Case Study Rand fortunate Resources plc Rand aureate resources plc is a London Stock Exchange gold mining and find ? rm with almost completely its activities pennyred in Africa. This case study concerns a hypothetical gold discovery of 300,000 ounces of gold in the Mwanza region at the labor union tip of Tanzania. Randgold can only ask out 50,000 ounces per year from the Mwanza mine and changeable declivity constitutes ar a consumption of the gold terms.The gold price is evaluate to evolve as follows 1 Cases and Exercises for lever and Capital Budgeting Year Gold price 1 $1,070 2 $1,120 3 $1,200 4 $1,100 5 $1,000 6 $950 The discovery comes on the heels of a massive ? ve-year geographic expedition and discovery programme that cost $20 gazillion. Although the exploration and discovery programme has now been completed, the ? rm lock need to pay $8 million this year and $5 million close year (year 1) as a delay payment to suppliers. Randgold will need to lease the land from the Tanzanian government for $10 million per annum.Mining equipment and mining billet (spanning ? ve miles) will need to be constructed at the cost of $70 million and this should be depreciated using 20 per cent step-down balances over the 6 year advise. relieve that the equipment and mining quarters can be sold for only 20 per cent of residual value at the end of the project. The workforce will cost $10 million per annum but 30 per cent of the workforce will come from be operations elsewhere in Africa. If the Mwanza mine is not put into operation, the workforce that comes from actual operations would lose their jobs.Working slap-up is expected to increase by $8 million at the head start of the project and this will fall to zero at the end of the project. The effective revenue enhanc ement gait of Randgold Resources is 28 per cent and the appropriate brush aside rate is 20 per cent. (a) Is it worthwhile for Randgold Resources to start production? Use three investiture appraisal methods to justify your upshot. (b) What are the chief(prenominal) risk factors facing Randgold Resources in the mining project? Discuss these in detail. 4. We are evaluating a project that costs ? 896,000, has an eight-year life, and has no salvage value.Assume that depreciation is 20% reducing-balance method. sales are projected at 100,000 units per year. Price per unit is ? 38, protean cost per unit is ? 25, and ? xed costs are ? 900,000 per year. The tax rate is 35%, and we require a 15% return on this project. (a) maneuver the accounting break-even point. (b) organise the base-case cash ? ow and NPV. What is the esthesia of NPV to changes in the sales ? gure? Explain what your answer tells you rough a 500-unit decrease in projected sales. (c) What is the sensitivity of OC F to changes in the variable cost ? gure?Explain what your answer tells you about a ? 1 decrease in estimated variable costs. (d) Suppose the projections given for price, quantity, variable costs and ? xed costs are all accurate to within 10%. Calculate the best-case and worst-case NPV ? gures. 5. The ? rm SENSITIVITY is studying the realisation of a project of launching a bracing toothpaste. The Marketing Department indicates the following estimations (in thousands of euros) argumentation Sales (quantity) Advertisement costs Sales price evaluate 1,450 tonnes 10% of sales 5/tonne 2 Cases and Exercises for Value and Capital Budgeting.