Question

3) Apex Silver Mines is considering whether to buy a new electrolytic refiner. The refiner costs $150,000, and will be depreciated using double declining-balance depreciation over its lifetime of seven years. The equipment is expected to generate $75,000 in increased silver production per year, in current dollars, and the company's tax rate is 40%. The company expects that silver prices will increase at an annual rate of 7%, while the general rate of inflation of other goods and services in the economy is estimated at (a) Determine the before-tax cash flows for this investment for years 0 through 7, not considering inflation. (b) Now, adjust the before-tax cash flows in years 1 through 7 to reflect increased silver prices. (Note that these cash flows will be in nominal dollars.) (c) Compute the after-tax cash flows, and deflate them to show the after-tax cash flows in dollars of constant purchasing power. (d) Apex has stated that it wishes to earn a minimum acceptable rate of return of 20% after taxes, in real (constant) dollars. Under this criterion, is the new refiner a good investment?

Answer 1

First year depreciation= 150000*(2/7)=$42857.14

c.

А в 1 Year Incrased Revenue Depreciation Initial Cost 0 150,000.00 oooo vou Awn- 75,000.00 80,250.00 85,867.50 91,878.23 98,309.70 105,191.38 112,554.78 42,857.14 30,612.24 21,865.89 15,618.49 11,156.07 7,968.62 5,691.87 Book Value of Asset Taxable income Tax 150,000.00 107,142.86 32,142.86 12,857.14 76,530.61 49,637.76 19,855.10 54,664.72 64,001.61 25,600.64 39,046.23 76,259.73 30,503.89 27,890.16 87,153.63 34,861.45 19,921.55 97,222.76 38,889.10 14,229.68 106,862.91 42,745.16 Present Value of After tax cash flow After tax income After tax cash flow (After tax cash flow/1.2^year) (150,000.00) (150,000.00) 62,142.86 105,000.00 87,500.00 60,394.90 91,007.14 63,199.40 60,266.86 82,132.74 47,530.52 61,374.33 76,992.82 37,130.03 63,448.25 74,604.31 29,981.80 66,302.28 74,270.89 24,873.17 69,809.61 75,501.48 21,071.08 Total(NPV) 161,286.01

A k 1 Year O am tinoooo nMin Present value of after ta cash flow with respect to infaltion rate After tax cash flow (cash flow/1.1^year) (150,000.00) (150,000.00) 105,000.00 95,454.55 91,007.14 75,212.51 82,132.74 61,707.55 76,992.82 52,587.13 74,604.31 46,323.41 74,270.89 41,923.98 75,501.48 38,744.20 Total(NPV) 261,953.33 10 11

d. We can see that the NPV of the project is $161286 which is greater than zero, and therefore the project should be accepted.