Question

Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost​ $100 million today. The mine is expected to generate​ $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend​ $20 million to restore the land to its original pristine nature appearance. The payback period for Rearden's mining operation is closest to:
(A) 5.00 years
(B) 6.00 years
(C) 6.25 years
(D) 6.50 years

Answer 1

Answer:

The correct answer is C.

Explanation:

Giving the following information:

The initial purchase of the land and the associated costs of opening up mining operations will cost​ $100 million today. The mine is expected to generate​ $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend​ $20 million to restore the land to its original pristine nature appearance.

We need to sum each cash flow until the total initial investment is paid:

Number of years= 100,000,000/16,000,000= 6.25 years

To be exact:

0.25*365= 95 days

It will take 6 years and 95 days to recover the initial investment.