Case Study #2
IE 5304 - Advanced Engineering Economy
S

Question

Case Study #2
IE 5304 - Advanced Engineering Economy
Summer 2022
You are evaluating a mining project in South America. Leasing the land and the mineral rights from the
government will cost $450,000 to win the lease and $50,000 annually as the lease payment for 22 years.
In the first year developing the deposit will require $100,000 for the initial planning and $400,000 for
core drilling to better delineate the deposit.
In year 2, $1,250,000 will be required to purchase and install the drag-line. Its salvage value will be zero,
and it will cost $200,000 per year to operate. Roads and buildings will cost another $950,000 in year 1
and $175,000 annually. At the start of year 3, the following equipment will be purchased:
•
16 off-road dump trucks for $150,000 each – ten year life
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•
6 pickups for $25,000 each - five year life
•
4 loaders for $190,000 each - ten year life
•
2 conveyors for $325,000 each - ten year life
All the listed equipment from above will have a salvage equal to 10% of the first cost. Annual operating
and maintenance costs are estimated to be 33% of the first cost for the vehicles and 20% for the
conveyors. Assume purchases of equipment made at the end of their useful lives can be made at the
same costs listed above.
In year 3, the production volume will be 50,000 tons. This will increase to 75,000 tons for years 4
through 6, but then will fall by 2% per year. The initial yield from the deposit will be 1.3%, but will fall by
0.04% per year (as a percentage). The minerals are worth $1.80 per pound now, which is expected to
increase by $0.03 per year.
Calculate the following utilizing Excel:
A. If the interest rate is 9%, find the project's Net Present Value (NPV).
B. What happens in terms of NPV if a labor strike stops production for all of Year 7?
C. Run your financial model for 5%, 7%, 9%, 12%, and 15%. Plot NPV versus interest rate. What
conclusions can you draw from the graph?
D. Utilize Goal Seek/Solver to calculate the initial mineral worth that produces a Net Present Value
equal to zero at an interest rate of 9%.
Turn in one Excel file. Clearly outline the various cash flow tables. Structure the problem as a table
organized by "Revenue less Costs" by year. Embed the questions (A-D) in the spreadsheet and clearly
state the solutions for each question. You will be graded on formatting and appearance it needs to look
professional. Design how the problem solutions will be designed/look prior to starting the problem. Use
the power of Excel!!!
Include the following in your submission: Information Block, Data Block, Analysis Block, Graphics
Block and Discussion Block. Important note: this is not a group project. You MUST work individually.
You will be penalized if you work together.

Ram Kumar · Accepted Answer

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