problem22 option to wait- hickock mining is evaluation when to open a gold mine.
ID: 2663280 • Letter: P
Question
problem22option to wait- hickock mining is evaluation when to open a gold mine. the mine has 60,000 ounces of gold left that can be mined, and mining operations will produce 7,500 ounces per year. the required return onthe gold mine is 12 percent and it will cost $14 million to open the mine. when the mine opened, the company will sign a contract that will guarantee the price of gold for the remining life of the mine. if the mine is open today, each ounces of gold will generate an aftertax cash flow of $450 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 $500 per ounce and 40 percent probability that the aftertax cash flow will be $410 per ounce. what is the value of the option to wait?
Explanation / Answer
ok. from what I see the majority of the information doesn't matter. What does is the net cost of now vs then: to compute we do: value * amount * probability 450*60000*1 v 410*60000*.4+500*60000*.6 so the second is 840,000 more than the first. I'd wait.
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