In: Business and Management

Submitted By hhhyyy09
Words 333
Pages 2
What is the bidding strategy for the project in the context of a competitive, close bidding process?
Rules are B1 and B2, where Bid Value = B1 +30% B2 and * We must spend B1 * We pay a penalty of 30%*(actual spend-B2) of we choose to proceed with development

Natural Resource Projects
Exploration → Development → Production
Here, the seismic and core studies are very old and limited

Key Determinants of Mine Value (The major ones are underlined) * Size of deposit and production profile (composition/mix/concentration) * Price path of Cupper and Zinc * Cost of Capital/Requited Rate of return (for this project) * Operating costs (labor, production costs, etc.) * Capital expenditures * Foreign exchange rate * Government stability/political risk * How does fit into Peru and our strategic objectives? * Tax rates/relief * Capital market conditions (we need a lot of capital)
If you had to evaluate this as a traditional NPV project, what cash flows and what discount rate? * Project cash flows depend on price path → Monte Carlo simulates different paths * We can then use three possible outcomes (high, medium and low) and if we take the EV of the three → expected cash flows * We need to take the appropriate discount rate → probably pretty high

Is this the right way to model this project?
We are ignoring the options → flexibility is worth something * Abandon after exploration without penalty * Spend less on development * If we’re not happy with prices, we can lower or temp shutdown production * Abandon the project

How do we value a project using real options?

* Use traditional option models (binomial model or Black Scholes) to model variability/risk/the stochastic nature (as opposed to static nature) of key variables * Simulation models, e.g., a Monte Carlo…...

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