earth mining
Analysis of the various approaches
With regards to project valuation, we were presented with four different approaches. In the end, we decided to value the project using Approach 4. The reason for this is because out of all 4 approaches, Approach 4 adequately takes into consideration of the following factors: the fact that an independent entity (i.e. NESA) is taking on this project rather than New Earth Inc., the special financing package, and the high rate of return that equity investors (i.e. shareholders of New Earth Inc.) require on this project. Approach 1 unfortunately does not take into consideration that a separate entity is undertaking
the investment, and so the usage of New Earth’s corporate WACC
(14%) to discount the project cash flows does not seem applicable. Approach 2 is more conservative than Approach 1 with the addition of an expected return premium of 10% (resulting in a WACC of 24%), but adding a premium does not justify that the modified WACC accurately reflect the cost of capital for NESA. Approach 3 is better since it factored the items that the previous two approaches left out. However, it does not take the financing package into consideration. Therefore, when discounting the future cash flows and debt repayment, it will likely omit the
firm’s prepayments, thus not providing an accurate NPV to reflect the firm’s finance plan.
Under Approach 4, the cost of equity was estimated to be approximately 24%, which is a reasonable rate due to the risks that this investment brings to New Earth Inc. Since the WACC was not provided, it needs to be calculated. The calculated WACC is 9.45%. (Exhibit 1)
With regards to project valuation, we were presented with four different approaches. In the end, we decided to value the project using Approach 4. The reason for this is because out of all 4 approaches, Approach 4 adequately takes into consideration of the following factors: the fact that an independent entity (i.e. NESA) is taking on this project rather than New Earth Inc., the special financing package, and the high rate of return that equity investors (i.e. shareholders of New Earth Inc.) require on this project. Approach 1 unfortunately does not take into consideration that a separate entity is undertaking
the investment, and so the usage of New Earth’s corporate WACC
(14%) to discount the project cash flows does not seem applicable. Approach 2 is more conservative than Approach 1 with the addition of an expected return premium of 10% (resulting in a WACC of 24%), but adding a premium does not justify that the modified WACC accurately reflect the cost of capital for NESA. Approach 3 is better since it factored the items that the previous two approaches left out. However, it does not take the financing package into consideration. Therefore, when discounting the future cash flows and debt repayment, it will likely omit the
firm’s prepayments, thus not providing an accurate NPV to reflect the firm’s finance plan.
Under Approach 4, the cost of equity was estimated to be approximately 24%, which is a reasonable rate due to the risks that this investment brings to New Earth Inc. Since the WACC was not provided, it needs to be calculated. The calculated WACC is 9.45%. (Exhibit 1)