The Lally Minning is a small size company that has total assets of $45 million, of which $4 million is cash. The company has appointed its vice president of business development, Larry Wilson, to look into a proposal for a project that could create value to the company. The pilot testing has revealed that carrying out such project could yield 340,000 kg per year of a chemical element X over a 7-year period, as well as 68 kg of a very valuable nature compound each year that worth $7,275 per kg. SWM has the capacity to borrow up to $9 million at 8% interest rate. The projected operating cost would be $900,000 each year (with fixed cost at $400,000 and variable cost at $500,000). The uncertainty of the project would be the initial cost and the market-selling price of the chemical element X. The capital investment for the project could cost $10 million with possible cost overruns of 10% or 15%. For tax purpose, assume that the capital investment could be depreciated using straight-line method over the 7-year period, and the tax rate is 35%. Meanwhile, there is an alternative way of implementing the project with a possible capital investment that would be reduced by $1.7 million. However, using this approach, the fixed cost of the projected operating cost would increase to $850,000 per year, result in higher overall operating cost per year. Regardless of how to carry out the project, a new government regulation for the project of such nature, if passed, would increase the capital investment by another $1.5 million. The current price of the chemical element X is $10,000 (per 1,000 kg) but the future price is anyones guess. The optimistic estimation is $14,000 (per 1,000 kg) while the pessimistic estimation is only about $7,500 (per 1,000 kg). Larry does not have a strong feeling about the price in either one. His best estimation is that the price will just increase with the inflation, which is about 3.5% per year, and the operating costs would increase with the inflation as well. In the market, similar project such as this requires a minimum nominal rate of return of 14%.

Larry need to evaluate NPV with base scenario ?

break even analysis for the other scenarios ?

what scenario does larry worry the most ?

where could extra information could be helpful?

should he delay the process ?

target debt ratio, What could be the other ratios calculated from given data?

USE EXCEL FOR CALCULATIONS!!