You are operating a gold mine that will extract 10 tons of gold per year for the next twelve years. You expect to sell the extracted gold for a per-ton price of $60 million every year for the next six years. For the final six years, you expect to sell the extracted gold for an uncertain per-ton market price of either $30M (50 percent probability) or $90M (50 percent probability). Assume that the cost of extracting each ton of gold is $45 million for all years.

1. a) Suppose that the risk-free rate is 3 percent and the market risk premium is 5 percent. Retrieve the beta of gold by looking up the primary gold exchange traded fund (symbol: GLD) on Yahoo! Finance. What is the expected return on gold? This will be used as your discount rate on your gold mining operations.

2. b) What is the value of your gold mining operation? This is calculated as the present value of expected future revenues minus the present value of future costs.

You will learn at t=6 whether the per-ton gold price for the last six years will be $30M or $90M.

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