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Cash Flow in Natural Resources Extractive Projects

This Oil-Gas/Mining project generates 1 million units of production per year (Oil=Barrels, Mining=Tons of Ore). Every unit of production (tons or barrels) is priced at $145 per unit. Project starts in year zero (now). Revenues and costs will be realized in year one and will stop in year 32. Use a fixed (constant) cost of $8 million per year. Capital costs in year zero (start of the project) is $200 million. The production cost per unit is $9.0, and the processing cost per unit is $19.0

1. Based on the information above, create a table in excel and calculate annual costs and profits year by year and determine net profits (or losses) covering 32 years. (Please attach your excel table)

2. Sum all the 32 year net total profits including capital costs in year zero. Use excel and report the total Sum. (Please attach your excel table)

3. What is the price per unit that will make this project breakeven (zero profit)? Also solve this in excel.

4. Based on the cash flow from 32 years life, use the discount formula in every year to calculate the total net present value of your project. Please us the discount rate of 8%.

5. Assuming we want to close operations in our project at the end of year 20, use the compound formula (from 0 to year 20) to calculate the “future” value of this project at year 20. Assume a discount rate of 8%.

6. Using now a project life of 20 years from question 5, the CEO of the company is considering buying at the end of year 10 a fleet of 30 new trucks with a cost per truck of $6 million dollars, you as the project manager of the operation need to decide if this strategy keeps the total discounted value of

the project economical. Calculate the net present value (NPV) of this project.

Assume a discount rate of 8%.

7. Using the cash flows of the project in question 6, with a project life of 20 years, including the costs of the new trucks, you are now planning to sell all the project infrastructure at the end of year 20 (salvage value) for $150 Million what is the net present value (NPV) of the project (at year zero).

Assume a discount rate of 8%.

The price is based on these factors:

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