The Alger Co. operates a bauxite mine. The mine can produce 800,000 tons a year. The mine is currently closed and will cost $12 million to open it. When should the mine be opened?
A) At a net bauxite price after extraction/production costs equal to $15.00 per ton before discounting and valuing extended options.
B) At a net bauxite price after extraction/production costs greater than $15.00 per ton before discounting and valuing extended options.
C) If the mineable bauxite is available then the mine should be open because the cash breakeven is less than $15.00 per ton.
D) If mineable bauxite exists at any price close to $15.00 per ton if bauxite prices are high volatile.

Question

Quizplus · Accepted Answer

The correct answer is B because the mine should be opened when the net bauxite price after extraction/production costs is greater than $15.00 per ton. This ensures that the operation is profitable before considering factors like discounting and the value of extended options. Opening the mine at exactly $15.00 per ton (option A) does not account for the initial $12 million opening cost or potential future costs and risks. Option C is incorrect because it suggests opening the mine regardless of the price, as long as it is below $15.00, which could lead to losses. Option D is too vague and does not provide a clear financial threshold for decision-making.