Read Chapter 11 in your text and view the short video capture for this chapter under the Content module “Excel templates & text chapter videos”2. Do practice problem 11-9 and check your solution3. Individual Homework:Do problem 11-10 and post by 11:59 PM ET on the last day of the session4. Participate in this week’s discussion of the issues raised by your instructorA number of industrial products include gold and silver as a component. Because they have very good conductive properties. The S&M Smelting Company engages in the recovery of gold from such products and is considering a contract to begin extracting the gold from the recycling of personal computers. The project involves contracting with the state governments of three midwestern states to dispose of their PCs. The project will last for five years and the contract calls for the disposal of 200 000 PCs per year. Three tons of electronic scrap contains approximately one Troy ounce of gold. Moreover each PC contains approximately 6 pounds of electronic scrap and the processing cost involved in extracting the gold is $67.50 per ton of scrap. In addition the current (spot) price of gold is $592.80 and the forward price curve for the price per ounce of gold spanning the next five years is as follows:2011 — $679.40/ounce2012 — $715.10/ounce2013 — $750.60/ounce2014 — $786.90/ounce2015 — $822.80/ounceS&M estimates that the firm’s cost of capital is 10.5% and the risk-free rate of interest on five-year Treasury bonds is currently 5.0%. In addition S&M faces a 30% tax rate and the entire investment of $450 000 made in the project in 2010 will be depreciated using straight-line depreciation over five years with a zero salvage value.a) Estimate the after-tax (certainly equivalent) project free cash flows for the project over its five-year productive life.b) Using the certainly-equivalent valuation methodology estimate the NPV of the project.c) If we assume that gold prices will increase at a rate of 7% per year over the next five years what is the NPV of the project using the traditional WACC method of analysis based on expected project free cash flows where the WACC is estimated to be 10.5%? What rate of growth in gold prices is required to produce the same NPV using the traditional WACC approach as with the certainly-equivalent approach used in part b?
