Capital Budgeting Financial Analysis of a Mineral Essay

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Capital Budgeting

Financial Analysis of a Mineral Resources Opportunity on the North Ridge of Mt. Zircon

Situation Overview

Engineers working for Peru Resources have proposed a new mine on the North Ridge of Mt. Zircon. They have discovered a vein of transcendental zirconium ore that led them to believe that there was a sufficient amount to produce roughly 340 tons of this mineral per year for a seven-year period. Furthermore, it was believed that this vein may also contain hydrated zircon gemstones however this mineral resource is more difficult to predict beforehand and a conservative estimate of one hundred fifty pounds of this mineral could be sourced from this site on an annual basis.

The current market price for transcendental zirconium is ten thousand dollars per ton while the current price of hydrated zircon gemstones is three thousand three hundred dollars per pound. However, these prices are heavily dependent on the international market for these raw materials and as a result the prices may fluctuate significantly. That being the case, Maxine Peru, the company's CEO expects the market prices to remain at roughly the same levels; although the price will undoubtedly at least rise by the price of inflation.

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The cost of constructing the necessary equipment and hardware at the site to extract the minerals has been identified in the neighborhood of ten million dollars. However, once again, there is also variability in estimating such expenses and it is not uncommon for such projects to go over budget by ten or fifteen percent. Furthermore, there also environmental regulations that are on the books and if these regulations are enacted it could also add a million and a half dollars to the cost of mining the site. Given all of the variables that are subject to change, a detailed and thorough financial analysis must account for potential fluctuation in these estimates.

Financial Analysis

Revenue Potential

Zirconium Tons per Year

1

2

3

4

5

6

7

Sum

Quantity

Expected Price per Ton

$10,000.00

$10,300.00

$10,609.00

$10,927.27

$11,255.09

$11,592.74

$11,940.52

$76,624.62

Revenues at Expected

$3,400,000.00

$3,502,000.00

$3,607,060.00

$3,715,271.80

$3,826,729.95

$3,941,531.85

$4,059,777.81

$26,052,371.41

Low Price per Ton

$7,500.00

$7,725.00

$7,956.75

$8,195.45

$8,441.32

$8,694.56

$8,955.39

$57,468.47

Revenues at Low

$2,550,000.00

$2,626,500.00.....

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