Consider the gold mine problem we solved in Module 5, but assume that the parameters change such that the profits you make in each state of the world if the mine is open are now:
Today
profit = 40K
Next year
↑Profit = 80K
↓Loss = 0K
2-years ahead
↑Profit = 120K
→ Profit = 40K
↓Loss = -40K

Notice that these values correspond to a case in which the volatility in the price of gold is lower than in the lecture notes. The discount rate is still 5%, and the cost of opening the mine is still 70 as in the lecture notes.

The NPV of opening the mine today and keeping the mine open is now equal to:

a). 47,235
b). 45,456
c). 44,367
d). 49,431

Answer rating: 100% (QA)

The NPV is 44367 NPV 70 40 5080 500 1 5 25 120 5040 ... View the full answer