Cash flows and likely distribution of values Harvard Case Solution & Analysis

Cash flows and likely distribution of values Case Study Solution

After conducting the analysis of the case, it can be determined that the cash flow calculated for 5 years shows a trend, where its cash flows had increased form 236,178,753 in year-1 to 471063906 in year-2. However, its cash flows had decreased in the 3rd year by 1,326,667 and kept on decreasing till the 5th year. Furthermore, the NPV calculated for the project is positive, which depicts that the project would generate 2,518,460,656 at the end of its life.  Hence, the maximum price paid for the project should be less than the NPV calculated, which would render the NPV negative, as a result, making the project unbeneficial.

Assumptions

To effectively analyze and calculate the NPV of the project, certain assumption were taken, where the WACC was assumed at 12%. Furthermore, the total initial investment was assumed to be 150 million adding the investment required in year 0 and year 1.Moreover, the waste cost was assumed to be an additional charge on the current annual mine ore cost of $65 amounting to $4 per ton of wastage.

Bonus Question

Following the scenario in the bonus question that if the government shuts down the operations of the mine in years-1, then in such a case additional cost amounting to 10 million would be charged on the operating cost of year-2. However, the NPV calculated under this scenario would be less as compared to the NPV calculated normally. Furthermore, cash flows after tax would decrease till 2nd year and its royalty would increase by 2% from its initial position at 3%, which would decrease the net revenues generated in year 2.

Cash flows and likely distribution of values

The cash flows of the company are stable. However, there is minor decline every year in the company, which might be because the company is not operating well, or the company’s expenses are increasing on a yearly basis. Furthermore, the company has the NPV of the $2,518.5 million.

Moreover, the company had developmental cost of $5 million initially, whereas it purchased equipment of $150 million. However, it also purchased the mineral rights at the cost of the $20 million. Furthermore, overall it incurred the cost of $175 million initially.

On the other hand, MACR depreciation was used to calculate the depreciation of the company. In this methodology, more depreciation was deducted initially, however, with time, the percentage of the depreciation declined on a yearly basis. For example, the depreciation in year one was 14%, and 25% in year 2. Similarly, the depreciation was 4.46% depreciation in year 8.

Cash flows and likely distribution of values

 

Furthermore, the company has the tax rate of 40%. If we analyze the company’s calculated data, then we can see that the company has stable cash flows, but they are declining slightly on a yearly basis. On the other hand, the company has been using its resources either in effeciently or the operating expenses are increasing, therefore it could be either one of the scenarios..............

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