Option 1: Building a new refinery The construction and installation of a new refinery will cost $22...

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Option 1: Building a new refinery
The construction and installation of a new refinery will cost$22 million. In addition, a processing plant will also need to beconstructed at a cost $6 million. This plant will need to besupplied with grinding machines, DMS flotation machines and otherequipment at a total cost of $16 million. Kidman Resources’ currentfleet of Haul trucks, water carts and dump trucks will meet theneeds for this project, however until recently, the fleet has beenearning a rental income of $120,000 per year.
Under the agreement with Tesla inc., the lithium mined isexpected to generate a revenue of $15 million per year, which willincrease by 2.8% per annum adjusted for rising costs. Due to theadditional complexities involved with the construction andmanagement of this new refinery, 5 new engineers (yearly salary perengineer $160,000) will replace 5 existing engineers (yearly salaryper engineer $120,000). All other remaining labour force requiredis expected to cost $3 million per annum for the duration of theproject.

For tax reasons you will expense the cost of the processing plantimmediately. The cost for the construction and installation of thenew refinery and associated machines and equipment will bedepreciated over three years using the straight-line method. Due tothe nature of the mining project, the machines and equipment willlikely have a salvage value of $10 million at the end of threeyears. Finally, the required net working capital is $2 million.
Option 2: Outsourcing the supply of ore
Alternatively, Kidman Resources can contract BHP to supply therequired ore to process into lithium hydroxide. Based on therequired amount of lithium hydroxide, management has quoted a totalcost of $28 million. BHP has however offered this rate on thecondition that Kidman Resources pays 20% of the total cost inadvance in the beginning of the year, with the remaining paid inequal instalments thereafter. Kidman Resources will process the oreinto lithium hydroxide using existing facilities at an expectedcost of $4.4 million per year.
Calculate NPV for option 1 and 2. Tax rate= 28%,discount rate= 10%

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Option 1: Building a new refineryThe construction and installation of a new refinery will cost$22 million. In addition, a processing plant will also need to beconstructed at a cost $6 million. This plant will need to besupplied with grinding machines, DMS flotation machines and otherequipment at a total cost of $16 million. Kidman Resources’ currentfleet of Haul trucks, water carts and dump trucks will meet theneeds for this project, however until recently, the fleet has beenearning a rental income of $120,000 per year.Under the agreement with Tesla inc., the lithium mined isexpected to generate a revenue of $15 million per year, which willincrease by 2.8% per annum adjusted for rising costs. Due to theadditional complexities involved with the construction andmanagement of this new refinery, 5 new engineers (yearly salary perengineer $160,000) will replace 5 existing engineers (yearly salaryper engineer $120,000). All other remaining labour force requiredis expected to cost $3 million per annum for the duration of theproject.For tax reasons you will expense the cost of the processing plantimmediately. The cost for the construction and installation of thenew refinery and associated machines and equipment will bedepreciated over three years using the straight-line method. Due tothe nature of the mining project, the machines and equipment willlikely have a salvage value of $10 million at the end of threeyears. Finally, the required net working capital is $2 million.Option 2: Outsourcing the supply of oreAlternatively, Kidman Resources can contract BHP to supply therequired ore to process into lithium hydroxide. Based on therequired amount of lithium hydroxide, management has quoted a totalcost of $28 million. BHP has however offered this rate on thecondition that Kidman Resources pays 20% of the total cost inadvance in the beginning of the year, with the remaining paid inequal instalments thereafter. Kidman Resources will process the oreinto lithium hydroxide using existing facilities at an expectedcost of $4.4 million per year.Calculate NPV for option 1 and 2. Tax rate= 28%,discount rate= 10%