Hickock Mining is evaluating when to open a gold mine. The mine has 37,200 ounce

Question

Hickock Mining is evaluating when to open a gold mine. The mine has 37,200 ounces of gold left that can be mined, and mining operations will produce 6,200 ounces per year. The required return on the gold mine is 10 percent, and it will cost $34.2 million to open the mine. When the mine is opened, the company will sign a contract that will guarantee the price of gold for the remaining life of the mine. If the mine is opened today, each ounce of gold will generate an aftertax cash flow of $1,420 per ounce. If the company waits one year, there is a 55 percent probability that the contract price will generate an aftertax cash flow of $1,620 per ounce and a 45 percent probability that the aftertax cash flow will be $1,320 per ounce.

What is the value of the option to wait? (Enter your answer in dollars, not millions of dollars, e.g.. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

NPV in case of first option:

NPV in case of waiting value of one year:

Value would be the differnce between the NPV's of both the option:

= $5,898,885 - $ 4,143,715

= $ 1,755,170

Year Investment Ounces Cashflow PV 0        (34,200,000) (34,200,000) 1          6,200       8,804,000        8,003,636 2          6,200       8,804,000        7,276,033 3          6,200       8,804,000        6,614,576 4          6,200       8,804,000        6,013,250 5          6,200       8,804,000        5,466,591 6          6,200       8,804,000        4,969,628 NPV        4,143,715

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.