Question

An Australia mining company, QMC is thinking about opening a new gold mine in South Africa. The mine is expected to produce 100,000 ounces of gold per year for 5 years. The current price of gold is US$1700 per ounce and the company will hedge its sales at this price for the 5-year period. The mine is expected to cost A$ 100,000,000 to set up and extraction costs are expected to be US$1350 per ounce for the life of the mine. The appropriate discount rate is 0.15. The current exchange rate is US$ 0.73 /A$. Profits are taxed at 30%. In order to decide the viability of this project, QMC needs to know the NPV. Calculate the NPV to the nearest dollar.

Answer 1

​​​​​​Australia mining company thinking openning new gold mine in south africa

Cost in aus $ intially = 1000000000

Exchange rate 0.73us $ /aus$

Cost in terms of us $ = 730000000

Production of gold per year 100000 ounc

Revenue per ounce = us $ 1700

Expenditure per ounce = us $ 1350

Cost of capital is 15%

Tax rate = 30%

* Details for depreciation on mine is not given so we ignore it during calculation if questions give such detail we could enjoy tax benefit on depreciation amount and answer would change positive to the extent of present value of depreciation

So npv for project is negative 647872200 . Company should not go for this project