The current price of gold is $400. The risk-free rate is 10% and the annual volatility for changes in gold prices is 30%. Gold prices are assumed to follow a lognormal distribution. Each year the mine is open a fixed cost of $1 million is incurred. This cost is incurred even if no gold is mined during the year. If we open (or re-open) the mine a cost of $2 million is incurred. If we shut the mine a fixed cost of $1.5 million is incurred. During the current year and each of the next 15 years we can, if the mine is open, mine up to 10,000 ounces of gold at a variable cost of $250 per ounce. What is the worth of this situation? Assume the mine is open at the beginning of year 1.

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