Hickock Mining is evaluating when to open a gold mine. The mine has 33,600 ounces of gold
Question:
Hickock Mining is evaluating when to open a gold mine. The mine has 33,600 ounces of gold left that can be mined and mining operations will produce 4,200 ounces per year. The required return on the gold mine is 12 percent and it will cost $17.4 million to open the mine. When the mine is opened, the company will sign a contract that will guarantee the price of gold for the remaining life of the mine. If the mine is opened today, each ounce of gold will generate an aftertax cash flow of $900 per ounce. If the company waits one year, there is a 60 percent probability that the contract price will generate an aftertax cash flow of $1,150 per ounce and a 40 percent probability that the aftertax cash flow will be $700 per ounce. What is the value of the option to wait?
Step by Step Answer:
We can calculate the value of the option to wait as the difference between the NPV of opening t...View the full answer
Corporate Finance
ISBN: 978-1259918940
12th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
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