You own a uranium mine, and the price of uranium is expected to increase at a rate of 3 percent per year. The cost of capital for your firm is 15 percent, and you are evaluating whether or not to begin harvesting the element. The correct choice is to begin harvesting immediately if the current NPV of the project is positive.

Question

Quizplus · Accepted Answer

If the current NPV of the project is positive, then the present value of the expected future cash flows from the uranium mine must be greater than the initial investment required to begin harvesting. Given that the price of uranium is expected to increase at a rate of 3 percent per year, there is potential for future cash flows to increase over time. However, the cost of capital for the firm is high at 15 percent, which means that the initial investment will need to generate a significant return to be profitable. Therefore, if the NPV is positive, it suggests that the expected cash flows are sufficient to generate a return that exceeds the cost of capital, and it would be advisable to begin harvesting immediately.

You Own a Uranium Mine, and the Price of Uranium