Goldmine AB is evaluating a new project to construct a gold mine in Sweden. The initial investment (in year 0) would be 10 000 million SEK (MSEK). This investment is depreciated linearly for tax purposes over the next twenty years. In the first year (year 1), the firm expects to extract 1 ton of gold. From the second year on, they expect to extract 2 tons of gold every year. The firm expects to extract gold from the mine for twenty years in total. The price of a ton of gold is expected to be 50 million Euros (MEUR) in all years. The firm uses a constant exchange rate of 1 EUR = 10 SEK over the project lifetime. Operating costs amount to 200 MSEK in the first year and increases with the expected inflation of 3% every year. After the mine is out of reserves, the firm is legally required to restore (rehabilitate) the area of the mine. The cost of (and cash outflow for) the rehabilitation is expected to occur in year 21. Such a rehabilitation would cost 1 000 MSEK now and the firm expects that the cost will be the same then in real terms. The investment is financed by equity and debt. The debt to equity ratio is 3. The risk-free long-term interest rate is 3%. The equity risk premium is 12.2%. Debt investors require 7% return on their investment. (All the percentages above in nominal terms.) Assume all cash flows occur at the end of the respective year. The tax rate is 20%.

a) Based on the payback period method, what decision should the firm make if the hurdle used for project evaluation is 10 years? (You can disregard the rehabilitation cost for this sub- question). b) Calculate the WACC for the project based on the information about the financing above. Based on the NPV method, should the firm undertake this project? Use the calculated WACC from question

b). [If you did not manage to calculate the WACC, use after-tax nominal WACC=9%. You can use the Fisher equation to calculate the real discount rate (n=r+i)]