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Question 3: (20) Mageba Limited has interests in gold mining and it operates in the...

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Question 3: (20) Mageba Limited has interests in gold mining and it operates in the Northwest Province. Its researchers have just come across new information that new gold deposits have been discovered in the Northern Cape Province. The company is interested in opening a new mine there, as it is projected that the mine will have a useable life span of 5 years. However, its directors are concerned about the general economic outlook of the country and especially the projected inflation figures and how this will affect the project cash flows. The expected average rate of inflation over the period is 6.83%. The firm's nominal cost of capital is 14%. Below are the expected project cash flows. Year 0 1 2 3 4 Cash Flow -20 000 000 8 000 000 8 000 000 10 000 000 10 000 000 WIN Page 4 of 6 5 10 000 000 3.1 Calculate Mageba Limited's real rate of return. (2) 3.2 Using the Net Present Value (NPV) method, determine if the new mining project will yield any benefits to Mageba Limited's shareholders. Take into consideration the projected inflation figures. (15) 3.3 Briefly explain how the inflation figures affect capital budgeting decisions

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