MiningMath

MiningMath

Loading...

Unlimited scenarios and decision trees for your strategic evaluations

NPV Calculation

Estimated reading: 6 minutes 1867 views

MiningMath's internal math for NPV Calculation

The following video explains more about the NPV calculation made by MiningMath’s algorithm. The understand of these steps might be useful for users working on projects with variable mining costs, which are not yet smoothly implemented on the UI.

Video 1: NPV calculation.

The discount rate (%/year) is provided by the user in MiningMath’s interface, as depicted in the figure below.

Figure 1: Interface example to define discount rate (%/year)

In a usual scenario period ranges are defined by annual time frames, as depicted in Fig-2.

Figure 2: Interface example with annual time frame

In this case, the annual discount rate multiplier (annual_multiplier) to return the discounted cash flow is performed as follows:

\(\text{annual_multiplier}(t) = \) \(\frac{1}{(1 + \text{input discount rate})^t}\)

The table below exemplifies one case for 10 periods.

Period Process 1 Dump 1 NPV (Discounted) M$ Annual multiplier Undiscounted NPV M$
1
P1
Waste
1.2
0.909
1.320
2
P1 +5%
Waste
137.9
0.826
166.859
3
P1 +5%
Waste
132.5
0.751
176.358
4
P1 +5%
Waste
105.4
0.683
154.316
5
P1 -5%
Waste
89
0.621
143.335
6
P1 -5%
Waste
92
0.564
162.984
7
P1 -5%
Waste
91.3
0.513
177.918
8
P1 -10%
Waste
52.3
0.467
112.110
9
P1 -10%
Waste
54.3
0.424
128.037
10
P1 -10%
Waste
12.1
0.386
31.384

Table 1: Example of annual multiplying factors and undiscounted cash-flows for a 10% discount rate per year. Process 1 exemplifies the use of different economic values per period.

In details, Table 1 lists:
  1. the NPV (discounted) resulting from a 10 yearly period with a 10% discount rate per year.

  2. the annual discount rate (annual_multiplier) for each period; and

  3. the undiscounted NPV as the result of the discounted NPV divided by the annual_multiplier.

MiningMath allows the creation of scenarios in which period ranges are defined with custom time frames (months, trienniums, decades, etc.), as depicted in Figure 3.

Figure 3: Interface example with custom time frames

In this case, the discount rate is still provided in years on the interface. However, the discount rate per period follows a different set of calculations. To identity the correct multiplier (discount rate for a custom time frame) applied to each custom time frame, it is necessary to apply the formula below:

\( \text{mult}(t) = \frac{1}{(1 + \text{discount_rate}(t)) ^ {\text{tf_sum}(t)}}\)

where:

\(
\text{tf_sum}(t) = \sum_{i=1}^{t}\frac{TF(i)}{TF(t)}
\)

and

\(
\text{discount_rate}(t) = (1 + \text{annual_discount_rate})^{TF(t)} – 1
\)

and

\(
TF(t)=
\begin{cases}
1,& \text{if}\, t\, \text{is in years}\\
\frac{1}{12},& \text{if}\, t\, \text{is in months}\\ 3,& \text{if}\, t\, \text{is in trienniums}\\
etc.&
\end{cases}
\)

For example, to calculate the multiplier of the first period in figure 3, the equation would be:

\( TF(1) = \frac{1}{12} = 0.8333… \)

\( \text{tf_sum}(t) = \sum_{i=1}^{1}\frac{TF(1)}{TF(1)} = 1 \)

\( \text{discount_rate}(1) = (1 + \text{annual_discount_rate})^{TF(1)} – 1 = (1 + 0.1) ^ {1/12} – 1 = 0.007 \)

\( \text{mult}(1) = \frac{1}{(1 + \text{discount_rate}(1)) ^ {\text{tf_sum}(1)}} = \frac{1}{(1 + 0.007)^{1}} = 0.993 \)

Another example, to calculate the multiplier of period 15 in figure 3, the equation would be:

\( TF(15) = 3 \)

\( \text{tf_sum}(t) = \sum_{i=1}^{15}\frac{TF(i)}{TF(15)} = 2 \)

\( \text{discount_rate}(15) = (1 + \text{annual_discount_rate})^{TF(15)} – 1 = (1 + 0.1) ^ {3} – 1 = 0.331 \)

\( \text{mult}(15) = \frac{1}{(1 + \text{discount_rate}(15)) ^ {\text{tf_sum}(15)}} = \frac{1}{(1 + 0.331)^{2}} = 0.564 \)

Share this Doc

NPV Calculation

Or copy link

CONTENTS
Chat Icon

Hi, it's Mima here 😇 Ask me any questions!