Prosperous Mining operates an iron mine in the central African country of Congo. The mine's lease will expire in one year. The total amount of iron ore that can be mined in one year is expected to be 2 million tons. The following information is also available:

• Extraction of iron ore from this mine occurs at the end of the year.
• If demand is high, the price of iron ore is expected to be $55 per ton.
• If demand is low, the price of iron ore is expected to be $35 per ton.
• The current market price of iron is $40 per ton.
• Extraction costs will be $45 per ton at the end of the year, regardless of the level of demand.
• The one-year risk-free interest rate is 4%.
• If the mine is not profitable, it can be closed down at zero cost.

Required:

Calculate the value of abandonment option for the mine.

Answer rating: 100% (QA)

NPV of continuation for 1ye... View the full answer