Question: Marcal Corporation is considering a silver mining project would cost $18 million today and generate positive cash flows of $3.5 million a year at the end of each of the next 10 years. The project's cost of capital is 12%.
a. Calculate the project's NPV if the company proceeds now.
b. The company is fairly confident about its cash flow forecast, but expects to have better price information in 2 years. The company believes the cost would be $19 million in 2 years. It estimates there is a 50% change CFs will be $4 million for 10 years and a 50% change CFs will be $2 million for 10 years. Should the company proceed with the project now or wait 2 years until it has better information?
c. Apart from the calculations above, discuss 3 qualitative factors that the company should consider when making its decision on accepting the new project.