In defence of NPV

Authors: Byrne, G Download Paper Open access courtesy of:

DOI https://doi.org/10.36487/ACG_repo/2315_083

Cite As:
Byrne, G 2023, 'In defence of NPV', in B Abbasi, J Parshley, A Fourie & M Tibbett (eds), Mine Closure 2023: Proceedings of the 16th International Conference on Mine Closure, Australian Centre for Geomechanics, Perth, https://doi.org/10.36487/ACG_repo/2315_083



Abstract:
At previous mine closure conferences, there have been many criticisms of the use of NPV (net present value) in the use of mine closure cost estimates. Many of these criticisms have argued that NPV should not be used at all. It is considered that the discussion is really about the use of discounting. Whilst acknowledging that NPV can be mis-used and mis-understood, they are not reasons to discourage its use – do not throw out the baby with the bath water! This paper outlines the use of discounting for the different types of mine closure cost estimates, specifically: The adoption of discounted cost estimates, using NPV discount rates, is an acknowledged and accepted accounting process for the development of balance sheet provisions and AROs. The balance sheet provision (or ARO) estimate should not, however be confused with the actual closure cost budget or any regulatory closure bond. All of these cost estimates have different purposes and typically use different calculation methods, albeit using a common data set. It is argued that NPV can and should be used in each of these closure cost estimates, but in different ways. This paper discusses the reasons for using NPV discounting, its potential mis-use and its benefits, noting that it is an essential element for estimating the costs for long term and in perpetuity site management.

Keywords: net present value, discounting, closure cost estimate, financial assurance, in perpetuity.

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