MINING INVESTMENT ANALYSIS

PROBLEM III
(March 8, 2017)

1. A foreman in a processing plant wants to evaluate whether to rebuild and repair

five existing assets or replace them with four new assets that are more
productive and capable of providing the same service as the current five
machines. Four new assets can be acquired at time zero for a total cost
$240.000. The total maintenance, insurance and operating costs for new
equipment is $20,000 at time zero, $40,000 at year one, $50,000 at year two
and $30,000 at year three. The anticipated salvage for these assets after three
years is $100,000. The alternative is to repair the existing machine for total cost
of $50,000 at time zero. However this approach will realize much higher
operating cost for the repaired assets is estimated at $20,000 at time zero but
that escalates to $140,000 in each of years one and two and $70,000 in year
three. The used machine have no salvage value today in the marketplace due to
their current condition. The desired minimum rate of return on invested capital
is a nominal 15.0%. Use present worth cost analysis and support the cost
findings with an incremental analysis using ROR and Net Value (NPV, NAV,
NFV) to determine which alternative is economically preferred.
2. A firm is evaluating whether to lease or purchase four trucks. The four trucks
can be purchase for a total cost of $240,000 and operated for maintenance,
insurance and general operating costs of $20,000 at year 0, $40,000 at year 1,
$50,000 at year 2 and $30,000 at year 3 (putting operating costs at the closest
points in time to where they are incurred) with an expected salvage value of
$100,000 at the end of year 3. The four trucks could be leased for $120,000 per
year, for the 3 years, with monthly payments, so consider $60,000 lease cost at
year 0, $120,000 per year at years 1 and 2 and $60,000 at year 3, putting lease
costs at the closest point in time to where they are incurred. The lease costs
include maintenance costs but do not include insurance and general operating
costs of $10,000 at year 0, $20,000 per year at years 1 and 2 and $10,000 at
year 3. If the minimum ROR is 15% before tax considerations, use PW cost
analysis to determine if economic analysis dictates leasing or purchasing.
Verify your conclusion with ROR, NPV, NAV and NFV analysis.