You are considering investing in a new gold mine in South Africa. Gold in South

Question

You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $270 million. Once this investment is made, the mine is expected to produce revenues of $32 million per year for the next 20 years. It will cost $13 million per year to operate the mine. After 20 years, the gold will be depleted. The mine must then be stabilized on an ongoing basis, which will cost $5.1 million per year in perpetuity. Calculate the IRR of this investment. (Select the best choice below.) A. The IRR is infinite as a result of the perpetuity. B. There are multiple IRRs. C. No positive IRR exists since the NPV, calculated as a function of various discount rates, never equals or exceeds zero. D. The IRR is about 10%.

Explanation / Answer

Answer: A. The IRR is infinite as a result of the perpetuity

=> As the stabilization is ongoing after 20years @ $5.10 m per year in perpetuity. So, the cash moves like this:

So, there exists no IRR due to perpetuity existence in the project.

Y0 Y1 Y2 Y3 continue Y20 Y21 Y22 to Perpetuity to Y19 -270m 19m 19m 19m 19m -5.10m -5.10m to Perpetuity

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.