The Black Mountain Mining Company has just purchased the mining rights for a gold mine for $150 million. The proven reserves are 180,000 ounces that BMMC estimates that it can produce in three equal installments over the coming three-year period. The current price of gold is $1,240 per ounce and BMMC expects the price to increase by 6.4% per year for three years. It estimates the total cost of producing the gold at $280 per ounce in year one and expects that to grow by 3.6% per year for the following two years. The required rate of return on the mine is 20% per year. Assume no taxes.
1. BMMC uses its estimates for production, price, and cost and calculates the NPV of the project. How much is that NPV?
2. After they come up with the NPV estimate, one of the financial managers realizes that an avoidable mistake could have been made in the estimates they came up with. Identify the most likely source of the mistake.
3. Recalculate the NPV after correcting the mistake in part b above.