You are operating a gold mine that will extract 10 tons of gold per year for...

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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. 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. 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. c) Now assume that you have the option at t-6 to ramp down gold production to three tons per year for the last six years of operations. Illustrate why you would only ramp down production to three tons per year if the gold price ends up being $30M per ton for the final six years. d) What is the value of your gold mining operation at t=0, given that you have the option at t=6 to ramp down gold production to three tons per year for the final six years of operations? 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. 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. 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. c) Now assume that you have the option at t-6 to ramp down gold production to three tons per year for the last six years of operations. Illustrate why you would only ramp down production to three tons per year if the gold price ends up being $30M per ton for the final six years. d) What is the value of your gold mining operation at t=0, given that you have the option at t=6 to ramp down gold production to three tons per year for the final six years of operations?

Answer rating: 100% (QA)

a To calculate the expected return on gold we need to determine the beta of gold Beta measures the sensitivity of an assets returns to the overall market returns In this case we can retrieve the beta ... View the full answer