Problem:
Eastern Shallow, LTD is a gold mining company operating a single mine .The present price of gold is $300 an ounce and it costs the company $250 an ounce to produce the gold.Last year ,50,000 ounces were produced and engineers estimate that at this rate of production the mine will be exhausted in 7 years The required rate of return on gold mines is 10%.
Required:
Question 1: What is the value of the mine?
Question 2: Suppose inflation is expected to increase the cost of producing gold by 10% a year but the price of gold does not change because of large sales of stockpiled gold by foreign governments .Furthermore ,imagine that the inflation raises the required rate of return to 21%. Now what is the value of the mine
Question 3: Suppose the company may shut ,reopen ,or abandon the mine in response to fluctuations in the price of gold .Can the NPV method be used to value the mine under these conditions.
Note: Please provide reasons to support your answer.