MIN E 408: Mining Enterprise Economics

Review of Economic Indicators

Resources:
Any economics book
A classic: Runge, 1998. Mining Economics and Strategy. 295 p.

Slides modified from Dr. Oy Leuangthong

Time Value of Money

Time Value Of Money

Basis: money received today is worth more than the same amount in
future.
Impact of interest on 2 alternate projects (streams of cash flow) is
used to select one of them.
Interest = money paid for the use of someone elses/banks money
= cost of borrowed money.
Interest rate = {interest payable / amount borrowed}*100%

02-1

Simple Interest, I
Annualized percentage amount borrowed paid for the use of
money

I P * n *i

(A) if n=1; i=10%; P=$1000.00

I1 $1000.00*0.1*1 $100.00
(B) if n=2 years; i=10%; P=$1000.00

I 2 $1000.00*0.1* 2 $200.00

Compound Interest
Interest plus principal or remaining balance forms basis for subsequent
years interest
Interest is applied to each periods basis
Basis = principal + interest
Future value of present sum

F P (1 i ) n
Present value of future sum

P F(1 i)n

02-2

Example
Estimate the value of $1,000.00 today @ 8% interest per annum at the
end of 5 years.

F 1000 (1 0.08) 5 $1,469

Or the present value of this future amount is given by

P 1469 (1 0.08 ) 5 $1,000

Another Example
One period only:

You have a mining property for sale

ABC Company offers you $1.3 million and is ready to wire the
cash into your savings account today!
XYZ Ltd offers you $1.5 million but will pay this next year
You trust that each company will deliver on its promise
Your Bank, offers you 12% interest rate on both your savings
and credit account.
Assume
(i) You dont really need cash
(ii) You need cash badly

What will you do?

02-3

Another Example contd

i)

You dont really need cash

Another Example contd

ii)

You need cash badly

02-4

Future Value Of Annualized Amount

(1 i)n 1
F A

E.g. Find the future sum at the end of 5 years of an annualized

series of $250.46 at the end of each year for the next 5 years at an
interest of 8% p.a.

(10.08)5 1
F 250.46*
$1,469
0.08

Future Value Of Annualized Amount

Thus the annualized amount is given

i
A F

n
(1
)
1

For previous example, the annualized amount can be calculated given

that F = $1469:

0.08
A 1469*
$250.46
5
1

0.08)

02-5

Present Sum Of Annualized Amount

Present Sum of Annualized Equivalent Series

(1 i)n 1
P A
n
i(1 i)

i(1 i)n
A P

n
(1 i) 1

Estimate the present sum of annualized equivalent series of $250.46 per year
@ 8% interest p.a.

(1.08)5 1
P 250.46
$1,000
5
0.08(1
i
)

Gradient Series

Future worth of a Gradient Series

02-6

Gradient Series
Present Sum of A Gradient Series

1 (1 ni)(1 i)n
P G

i2

Relation between Uniform and Gradient Series

1
n
A G

n
i (1i) 1

Example
The maintenance costs on a certain equipment are estimated to be
$500 in year 1 and to increase by $100/year. What is A if n=5 years.
and i=8% per annum?
Solution

n
A B G

n
i (1 i ) 1
B G ( A / G, i %, n)
1

5
500 100*

$685
5
0.08 (1 0.08) 1

02-7

Geometric Series
1 (1 k ) n (1 i ) n
C

ik

P
n

1 i

i k
i k

n
n

n 1 (1 k ) /(1 i )
C
(1

i
)

(i k )

F
n (1 i ) n

(1 k )

i k
i k

Example
Find the present equivalent of this cash flow stream;
C = $10,000.00; i = 15%; k = 10%; and n = 5 years.

1 (1 k)5 (1 i)5
P C

i
k

1 (1.10)5 (1.15)5
$10,000

0.15
0.10

$39,858

02-8

Problem Solving Method - Recommended

Use the following method to solve interest problems;

1. Draw a cash flow diagram. Include magnitude, timing and direction of
cash flows (Cash inflow or income is +ve; and cash outflow or cost is
ve). Include interest rate in diagram.
2. Using the various notations for the factors, write an equation to
represent the answer.
3. Put the values of the factors from the tables into the equation.
4. Calculate the answer
5. Check for accuracy.

Example
A piece of machinery requires an overhaul today which will cost
$1,000.00. It will require another overhaul 3 years hence which will cost
$1,500.00. Annual operating costs are $300/year. Find the presentworth of these costs at 6% if the machine has a life of 7 years.
n
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

F|P,i,n
1.06
1.1236
1.19102
1.26248
1.33823
1.41852
1.50363
1.59385
1.68948
1.79085
1.8983
2.0122
2.13293
2.2609
2.39656
2.54035
2.69277
2.85434
3.0256
3.20714

P|F,i,n
0.9434
0.89
0.83962
0.79209
0.74726
0.70496
0.66506
0.62741
0.5919
0.55839
0.52679
0.49697
0.46884
0.4423
0.41727
0.39365
0.37136
0.35034
0.33051
0.3118

F|A,i,n
1
2.06
3.1836
4.37462
5.63709
6.97532
8.39384
9.89747
11.49132
13.18079
14.97164
16.86994
18.88214
21.01507
23.27597
25.67253
28.21288
30.90565
33.75999
36.78559

A|F,i,n

P|A,i,n
1
0.9434
0.48544 1.83339
0.31411 2.67301
0.22859 3.46511
0.1774 4.21236
0.14336 4.91732
0.11914 5.58238
0.10104 6.20979
0.08702 6.80169
0.07587 7.36009
0.06679 7.88687
0.05928 8.38384
0.05296 8.85268
0.04758 9.29498
0.04296 9.71225
0.03895 10.1059
0.03544 10.47726
0.03236 10.8276
0.02962 11.15812
0.02718 11.46992

A|P,i,n
A|G,i,n
F|G,i,n
P|G,i,n
1.06
0
0
0
0.54544 0.48544
1
0.89
0.37411 0.96118
3.06 2.56924
0.28859 1.42723
6.2436 4.94552
0.2374 1.88363 10.61822 7.93455
0.20336
2.3304 16.25531 11.45935
0.17914 2.76758 23.23063 15.44969
0.16104 3.19521 31.62447 19.84158
0.14702 3.61333 41.52193 24.57677
0.13587 4.02201 53.01325 29.60232
0.12679 4.42129 66.19404 34.8702
0.11928 4.81126 81.16569 40.33686
0.11296 5.19198 98.03563 45.96293
0.10758 5.56352 116.9178 51.71284
0.10296 5.92598 137.9328 57.55455
0.09895 6.27943 161.2088 63.45925
0.09544 6.62397 186.8813 69.40108
0.09236
6.9597 215.0942 75.35692
0.08962 7.28673 245.9999 81.30615
0.08718 7.60515 279.7599 87.23044

02-9

Solution (1)
1. Construct cash flow diagram. Only costs (outflows) are involved so
arrows point downwards

2. Write an equation to represent it

P P0 F ( P | F ,6%,3) A ( P | A,6%,7)

3. Put in values from table

P 1000 1500(0.83962) 3005.58238

4. Calculate the answer

5. Check the accuracy

P $3,934.14

Problem Solving Method - Alternate

Use the following method to solve interest problems;
1. Draw a cash flow diagram. Include magnitude, timing and direction of
cash flows (Cash inflow or income is +ve or ; and cash outflow or cost
is -ve or . Include interest rate in diagram.
2. Using the discrete interest rate formulae table, write a mathematical
equation to represent the answer.
3. Put the actual values from the diagram (question) into the equation.
4. Calculate the answer
5. Check for accuracy.

02-10

Solution (2)
1. Construct cash flow diagram. Since only costs (outflows) are involved, the
arrows will point downward

2. Write down mathematical equation

i (1 i ) 7 1

P P0 F (1 i ) 3 A
7
i (1 i )
3. Put in values from diagram

(1 0.06) 7 1

P 1000 1500(1 0.06) 3 300

7
0.06(1 0.06)
4. Calculate the answer
5. Check the accuracy

P $3,934.14

Review Of Main Points

Cash Flow Diagrams
Time Value of Money:
Present Value
Future Value
Annualized Value constant amount
Gradient Series constant amount of change
Geometric series constant rate of change

02-11