Case Study – Randolph Mining Company
PART A
Please read the following instructions carefully.
General
1. You must submit an electronic version of the paper. This is to be uploaded into the VLE via a link provided to you by the lecturer. Please ensure that your submission contains two separate documents – submit the essay-type questions as a MS Word document on Turnitin while a separate MS Excel file should contain your supporting calculations, including formulae uploaded on a different link.
2. Do not send the paper via an email. Under no circumstance will a paper be accepted when emailed to any member of the faculty.
PART B: Description of the Assignment
Case Study: Randolph Mining Company
1. What decision was the Randolph Mining Company facing? (10 marks)
2. NPV is the “theoretically-preferred” capital budgeting method. When, if at all, does it make sense to use a method other than NPV to evaluate a project? (10 marks)
3. Calculate the annual working capital requirements of the project. (5 marks)
4. Calculate the FCFF of the project for years 3 – 13 assuming all-equity financing. State any assumptions used. (15 marks)
5. Estimate the terminal value of the project if, as Carter assumed, the mine ceases operation after year 13. State any assumptions used. (5 marks)
6. Calculate the project’s NPV, IRR and payback period. Analyse these figures. (5 marks)
7a. Calculate the minimum price that the coal at the Boraca site must sell for in year 3 in order to make the project economically feasible. (5 marks)
7b. Calculate the minimum growth rate in the price of coal necessary to make the project economically feasible. (5 marks)
8a. The owners liked to see “various scenarios” developed in order to help them get a feel for the numbers. Develop conservative, best guess and optimistic scenarios. Defend the assumptions you use for each scenario. (10 marks)
8b. For each scenario, calculate and analyse the project’s NPV, IRR and payback period. (10 marks)
9. Define political risk and discuss its importance in making the decision? (10 marks)
10. Robert Watson’s instincts were to sell RMC’s rights to the Boraca site and not develop the site. Helen Watson, on the other hand, viewed development of the site as a “prudent risk”. Suppose they asked for your “honest opinion” about what they should do. Based on your previous answers and other information in the case, what do you recommend? Defend your advice. (10 marks)
Any results should be analysed and evaluated. A portion of the marks in the calculation questions are attributable to the analysis accompanying the numbers.
In your answers, in addition to the information from the Case Study, please apply the concepts from the appropriate areas of financial and economic theory, discussed during this and all previous modules during your course. Your answers should include appropriate numerical data and, if appropriate, charts/graphs.
End of paper
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