# Question: The CFO of CanGold Company is considering investing in a

The CFO of CanGold Company is considering investing in a gold mine in Mongolia. The mine will cost $200 million to get into production and will last for one year. At the end of one year, it is expected to produce 1 million ounces of gold. The price of gold is expected to be $500 an ounce in one year (the forward price). The current price of gold is $300 an ounce. Fixed costs of production are $50 million and variable costs are $250 per ounce. Assume no taxes or CCA. The appropriate discount rate for the mine is 15 percent. Risk-free borrowing and lending is available at a rate of 3 percent per year.

a. Based on NPV, should CanGold invest in the Mongolian gold mine?

b. If in one year, we know that the price of gold will be either $200 per ounce or $850 per ounce:

i. Describe how having the choice of closing the mine can change the value of the asset.

ii. Draw the decision tree for this project.

iv. Value the mine as a call option on gold. (Hint: use the arbitrage arguments behind the binomial option pricing model. Think of the mine as a financial security).

a. Based on NPV, should CanGold invest in the Mongolian gold mine?

b. If in one year, we know that the price of gold will be either $200 per ounce or $850 per ounce:

i. Describe how having the choice of closing the mine can change the value of the asset.

ii. Draw the decision tree for this project.

iv. Value the mine as a call option on gold. (Hint: use the arbitrage arguments behind the binomial option pricing model. Think of the mine as a financial security).

## Answer to relevant Questions

A consultant has presented the following statement to the board of directors of BigCo:When comparing two mutually exclusive projects, we only need to consider the NPV. When the two projects have different lives, we recommend ...What is the difference between sensitivity analysis and scenario analysis?Briefly describe three common defensive tactics against a takeover and the difference between U.S. and Canadian practice on poison pills.29. Calculate the trailing and forward P/E ratios using the price calculated in Practice Problem 28. Assume a 6 percent earnings growth.Complete the following balance sheet for the post-merger firm B-T. The bidder acquired the target for $2,000 incash.Post your question