(b) \((5\%)\) What is NPV in the worst-case scenario?

7. At a variable cost of $32 per ounce, 10,000 ounces of silver may be extracted from a silver mine. Regardless of whether the mine is open or closed, the annual fixed expenses of ownership are $40,000. Silver may sell for $48 an ounce in half of the years, while it can only sell for $24 in the other years. Ignore taxes. (a) \((5\%)\) What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined?

(b) \((10\%)\) Now suppose you can costlessly shut down the mine in years of low silver prices. What happens to the average cash flow from the mine?

8. (10%) Your firm has gained exclusive manufacturing rights for barkelgassers (BGs) in North America as a result of acquiring a significant patent. An immediate capital expenditure of $25 million will be required to construct production facilities for 200,000 BGs annually. The projected cost of production is $65 per BG. Until the patent expires in five years, the BG marketing manager is certain that all 200,000 units may be sold for $100 each (in real terms). After that, the marketing manager is clueless about the selling price. What is the NPV of the BG project? Assume the real cost of capital is 9%. To keep things simple, also make the following assumptions: The technology for making BGs will not change. Capital and production costs will stay the same in real terms. - Competitors know the technology and can enter as soon as the patent expires, that is, they can construct new plants in year 5 and start selling BGs in year 6. If your company invests immediately, full production begins after 12 months, that is, in year 1. There are no taxes. BG production facilities last 12 years. They have no salvage value at the end of their useful life.

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