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Corporate Finance Concepts

NEM is considering the proposed investment and production to begin from 2015 onwards and expected the cost of investment is estimated at $200m out of which 40 percent would be requiredin early 2013 and remaining 60 percent will be required in early 2014. The cost of investment includes construction, insurance, operating assets and working capital worth $20m. Fifty percent of $200m will be financed from overseas buyers. The present issue that the management is facing a selection of the discount rate for computation of NPV of the project. According to the VP of operations, the discount rate of NESA (new project) should be the cost of capital of parent entity or NEM. However, this approach is not suitable because NEM specialises in gold mining and new business is completely different (Armitage, 2005, pp.3-18). The account officer suggest that the discount rate should be at least 24%, which is also recommended by extthe ernal consultant. According to the financial analyst, the new project will be significantly leveraged by cheaper loans which will reduce the overall cost of capital of the project (Bose, 2006, p.57). The only risk faced by shareholders of NEM would be in form of dividends ($40m). The project cash flows should be discounted using Flow-to-Equity approach. This approach is highly recommended as this considers all the necessary factors.The prices of gold experienced an unprecedented boom at the beginning of 2013 when gold prices in the market rose from $300 per ounce to $1,700 per ounce. New Earth Mining (NEM) is a Denver-based company that specialises in the production of precious metals. It is the largest precious-metal producer in the United States. The company’s improved operating margins helped it to accumulate a large amount of cash as revealed in the balance sheet of the company. The company had $142 million cash and marketable securities in 2002 that accumulated to $1,732 million at the end of 2011. The company is planning to diversify its production into iron ore business.

Corporate Finance Concepts