You have been employed as an analyst by Deep Space Minerals plc. You work on a project designed to assess possible financial benefits of precious metals mining on other planets in the Solar system. You have been asked to look at a project valuing a recently discovered gold mine on the Moon, with estimated reserves of 10 million ounces. This is a 3-year long mining project due to start in 50 years. You are given the following schedule for extraction, purification, delivery to Earth and sale of the extracted gold:

Sale Time

(years from now)

Ounces

(millions)

51

5.0

52

3.0

53

2.0

Once the mining has started, there is no option to shut down the mine prematurely. The cost of the extraction, purification and delivery at the start of the project is expected to be 800 per ounce, and will be falling by 25% every year, as the space-mining process becomes more efficient. It is estimated that in 50 years the cost, installation and delivery to the Moon of the mining machinery will be 2,000 million and can be treated as a one-off (sunk) cost.

The current gold price is 1,000 per ounce. Today's forward price for gold settled 51 years from now is 1,100 per ounce, 52-year and 53-year forward gold prices are 1,250 and 1,200 per ounce, respectively. For simplicity, assume that there is no inflation and the risk-free rate of return is 6%. The market risk premium is 10%. Perform your calculations rounding up to2 decimal places accuracy.

a)What is the appropriate discount rate, if you are told that the risk profile of this project is similar to gold mining projects on Earth, which have beta of 0.9?

b)What is the net present value of the gold mine?

c)What will be the real net present value of the gold mine, if you are told that the annual inflation rate is 2%?