A Mining Company Will Spend $28 Million in Order to Exploit

question 105

Multiple Choice

A mining company will spend $28 million in order to exploit a low-grade placer deposit of gold ore.They estimate the deposit will produce profits of $6 million per year for six years.They calculate the net present value (NPV) using an estimated cost of capital of 6%.What is the maximum that the cost of capital can deviate from this estimate that still makes the decision to mine worthwhile?

• A)1.60%
• B)1.66%
• C)1.69%
• D)1.72%
• E)1.76%

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Definitions:

Cash Disbursements

Cash disbursements are the payments a company makes in cash, including expenses, debt payments, and distributions to shareholders.

Variable Selling And Administrative Expense

Costs that vary with sales volume, such as commissions or shipping charges.

Master Budget

A comprehensive financial planning document that includes all of a company's budgets, combining sales, production, and financial aspects to overview performance.

Sales Forecast

An estimate of the amount of sales a company expects to achieve over a specific period, often used for strategic planning and resource allocation.