You are negotiating the rights to mine a gold field for the next 30 years. The initial investment, all the equipment and the operating license, would cost you a million dollars upfront. Then you think you can mine 400 ounces of gold a year. An ounce is currently trading at $ 200 and you expect the price of gold to grow 4% per year. Your discount rate is 11%. Calculate NPV of this project. Based on these elements, would you launch the project? With a 12% capital requirement, is your decision changed?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the gold mining project we need to determine the cash flows over the 30year period and discount them back to present value using the given discount rate Given Initial investment 1000000 Gold mined per year 400 ounces Price of gold per ounce 200 Expected annual growth rate of gold price 4 Discount rate 11 1 Calculate the annual revenue from gold mining Annual Revenue Gold mined per year Price of gold per ounce Annual Revenue 400 200 Annual Revenue 80000 2 Calculate the expected annual growth in revenue Expected Annual Growth in Revenue Annual Revenue Growth Rate Expected Annual Growth in Revenue 80000 4 Expected Annual Growth in Revenue 3200 3 Calculate the total revenue for each year over the 30year period Total Revenue Annual Revenue Expected Annual Growth in Revenue Total Revenue 80000 3200 Total Revenue 83200 4 Calculate the total cash flow ... View the full answer