Mining Industry Economics

Lecture 9

Dr. Zeshan Hyder

Examples
 Announcements
• Homework 2

• Groups

• Attendance & Marks

• Scavenger Quiz 2

• Gold Competition 2
 Learning Outcomes/Objective
• Solve cash flow problems using various

compound interest formulas

• Evaluate time value of money concepts

3
How much must I deposit now to be able to
withdraw $1000 per year for next n years at i% rate?
This is an example of _________________ factor.
60%

A. A/F i, n

B. A/P i, n

20%
C. P/A i, n
10% 10%

D. P / F i, n
A. B. C. D.
4
A Roth IRA has a current value of $2 M. At i%
annual rate, what annuity is available over next 25
years? This is an example of ________ calculation.
77%
A. A/F i, n

B. A/P i, n

C. P/A i, n
9% 9%
5%
D. P / F i, n
A. B. C. D.
5
Deposit $100 now, what will be the amount 2
years from now @ i% interest rate?
79%
A. A/F i, n

B. A/P i, n

C. P/A i, n
12%
D. P / F i, n 2% 2%
5%

A. B. C. D. E.
E. F/P i, n 6
$100 now is worth more than $100 in future, This is
the principle of_____.
98%

A. Cost of Capital
B. Cash Value
C. Time Value of Money
D. WACC 2% 0% 0% 0%

E. MARR A. B. C. D. E.

7
 Formulas
• F = P (1 + i)n
• P = F (1 + i)-n
𝟏𝟏+𝒊𝒊 𝒏𝒏 −𝟏𝟏
• 𝐅𝐅 = 𝐀𝐀 𝒊𝒊

𝒊𝒊
• 𝐀𝐀 = 𝐅𝐅 𝟏𝟏+𝒊𝒊 𝒏𝒏 −𝟏𝟏

𝒊𝒊 𝟏𝟏+𝒊𝒊 𝒏𝒏 𝒊𝒊
• 𝐀𝐀 = 𝐏𝐏 𝟏𝟏+𝒊𝒊 𝒏𝒏 −𝟏𝟏
= 𝐏𝐏
𝟏𝟏− 𝟏𝟏+𝒊𝒊 −𝒏𝒏

𝟏𝟏+𝒊𝒊 𝒏𝒏 −𝟏𝟏 𝟏𝟏− 𝟏𝟏+𝒊𝒊 −𝒏𝒏

• 𝐏𝐏 = 𝐀𝐀 𝒊𝒊 𝟏𝟏+𝒊𝒊 𝒏𝒏
= 𝐀𝐀
𝒊𝒊
8
 Discrete End, Beginning and Mid Period Values
Several different timing considerations impacting investment
value on a time diagram
• Discrete end of period value: dollar value received at the
end of each compounding period, e.g. mortgage
• Beginning of Period value: e.g. leases
• Mid period approach: When uncertain of exact timing or
when dollars truly flowing throughout a time period,
middle of each period on diagram

9
 Example
• A person is to receive five payments in amount of $300 at the end
of year one, $400 at the end of each of year two, three and four, and
$500 at the end of year five. If the person considers that places exist
to invest money with equivalent risk at 9% annual interest, Calculate
• The time zero lump sump settlement P
• End of year five lump sump settlement F?
• Five equal end of year payments A, at years one through five that
would be equivalent to stated payments.
• Recalculate the present value assuming the same annual payments
treated as beginning of period values and
• Mid period values. 10
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5

• 𝐏𝐏 = P / F0.𝟎𝟎9, 1 + P / F0.09, 2 + P / F0.09, 3 + P / F0.09, 4 +

P / F0.09,5

11
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 n
P = F (1 + 0.09)−1 + F (1 + 0.09)−2 + F (1 + 0.09)−3
+ F (1 + 0.09)−4 + F (1 + 0.9)−5
= 300 (1 + 0.09)−1 + 400 (1 + 0.09)−2 + 400 (1 + 0.09)−3
+ 400 (1 + 0.09)−4 + 400 (1 + 0.09)−5
= 300 × 0.9174 + 400 × 0.8417 + 400 × 0.7722
+ 400 × 0.7084 + 500 × 0.6499
= $1,529 12
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5
𝐏𝐏=300(P / F0.𝟎𝟎9,1) + 400 (P / F0.09,2) + 400(P / F0.09,3)
+ 400(P / F0.09,4) + 500(P / F0.09,5)
= 300 × 0.9174 + 400 × 0.8417 + 400 × 0.7722
+ 400 × 0.7084 + 500 × 0.6499
= $1,529

13
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5
• 𝐏𝐏 = P / F0.𝟎𝟎9,1 + (P/A i, n )(P / F0.09,2) + P / F0.09,5
1−(1.09)−3
• P = F(1+.09)−1 + 𝐴𝐴( 0.09
)(1+.09)−1) +

F(1+.09)−5
• P = 300 × 0.9174 + 400 × 2.531 × 0.9174 + 500 ×
0.6499
• = $1,529 14
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5

• 𝐅𝐅 = F / P0.𝟎𝟎9, 4 + F / P0.09, 3 + F / P0.09, 2 + F / P0.09, 1 + P

15
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 n
F = P (1 + 0.09)4 + P (1 + 0.09)3 + P (1 + 0.09)2 + P (1
+ 0.09)1 + P (1 + 0.09)0
= 300 (1 + 0.09)4 + 400 (1 + 0.09)3 + 400 (1 + 0.09)2
+ 400 (1 + 0.09)1 + 500 × 1
= 300 × 1.412 + 400 × 1.295 + 400 × 1.1881 + 400
× 1.09 + 500
= $2,353 16
 Discrete End of Period Dollar Values

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5

• 𝐅𝐅 = F / P0.𝟎𝟎9,4 + (F/A i, n )(P / F0.09,1) + F / P0.09,𝟎𝟎

(1.09)3−1
• F= P(1+.09)4 + 𝐴𝐴(
0.09
)(1+.09)1) + P(1+.09)0

• P = 300 × 1.412 + 400 × 3.2781 × 1.09 + 500 × 1

= $2,353

17
 Equivalent Annual Payments “A”

P = ? $300 $400 $400 $400 $500

F=?
0 1 2 3 4 5
• 𝐀𝐀 = A / P𝒊𝒊,n or 𝐀𝐀 = A / F𝒊𝒊,n
𝑖𝑖 0.09
• A=P 1− 1+𝑖𝑖 −𝑛𝑛
= 1529(
1− 1+0.9 −5
)=1529x0.2571

• A= $393
𝑖𝑖 0.09
• 𝐴𝐴 = F 1+𝑖𝑖 𝑛𝑛 −1
= 2353(
1+0.9 5 −1
)=2353x0.1671

= $393
18
 Discrete Beginning, Present Value

P = ? $300 $400 $400 $400 $500

0 1 2 3 4
• 𝐏𝐏 = P / F0.𝟎𝟎9, 0 + P / F0.09, 1 + P / F0.09, 2 + P / F0.09, 3 +
P / F0.09,𝟒𝟒
• P = 300(1 + 0.09)0 + 400(1 + 0.09)−1 + 400
(1+0.09)−2 + 400 (1 + 0.09)−3 + F (1 + 0.9)−4
• = 300 + 400 × 0.9174 + 400 × 0.8417 + 400 ×
0.7022 + 500 × 0.7084
= $1,667 19
 Discrete Beginning, Present Value

P = ? $300 $400 $400 $400 $500

0 1 2 3 4
• 𝐏𝐏 = P / F0.𝟎𝟎9,0 + (P/A i, n ) + P / F0.09,4
1−(1.09)−3
• P = F(1+.09)0 + 𝐴𝐴( 0.09
) + F(1+.09)−4

• P = 300 × 1 + 400 × 2.531 + 500 × 0.7084

• = $1,667

20
 Discrete Mid Period Values

P = ? $300 $400 $400 $400 $500

0 0.5 1.5 2.5 3.5 4.5

• P = P / F0.09, 0.5 + P / F0.09, 1.5 + P / F0.09, 2.5 + P / F0.09, 3.5
+ P / F0.09,4.5
• P = 300(1 + 0.09)−0.5 + 400(1 + 0.09)−1.5 + 400
(1+0.09)−2.5 + 400 (1 + 0.09)−3.5 + F (1 + 0.9)−4.5
• = 300 × 0.9578 + 400 × 0.8787 + 400 × 0.8062 +
400 × 0.7396 + 500 × 0.6785
• = $1,596 21