The value of a mineral extraction project depends on the inventory in the ground (12,000 tons), the price in the spot market (currently $20 per ton), the cost of capital (12 ), the risk free rate (5 per year), the rate of extraction (4,000 tons per year), and the extraction cost ($22 per ton) Addit...

To solve the problem we have made the following assumptions If the mine is open to begin with it produces 4000 tons immediately so that if the mine st ...

The value of a mineral extraction project depends on the inventory in the ground (12,000 tons), the

Question:

The value of a mineral extraction project depends on the inventory in the ground (12,000 tons), the price in the spot market (currently $20 per ton), the (12%), the risk-free rate (5% per year), the rate of extraction (4,000 tons per year), and the extraction cost ($22 per ton). Additionally, there is a 50-50 chance the price can go up by 50% or down by 331% in a year. The cost of opening up is $20,000, while the cost of shutting down is $30,000. Should the mine start open or closed, and what is the optimal rule for shutting it down? What is its value? How does the answer change if the price of the mineral is currently $26?
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...