Southport Mining Corporation is considering a new mining venture in Indonesia. T

Question

Southport Mining Corporation is considering a new mining venture in Indonesia. There are two uncertainties associated with this prospect; the metallurgical properties of the ore and the net price (market price minus mining and transportation costs) of the ore in the future.

The metallurgical properties of the ore would be classified as either “high grade” or “low grade”. Southport’s geologists have estimated that there is a 70% chance that the ore will be “high grade”, and otherwise, it will be “low grade”. Depending on the net price, both ore classifications could be commercially successful.

The anticipated net prices depended on market conditions, and also on the metallurgical properties of the ore. Southport’s economists have simplified the continuous distribution of possible prices into a two-outcome discrete distribution (“high” or “low” net price) for the investment analysis. The probabilities of these net prices, and the associated outcomes (in millions of dollars), are summarized below.

Should Southport invest in the mine or not? What is their expected profit?

Southport should invest, the expected profit is 18.4.

Southport should not invest, the expected profit is -10.

Southport should invest if the price is high, the expected profit is 14.

Southport should invest, the expected profit is 9.2.

High Grade metallurgy (p=0.7) Low Grade metallurgy (p=0.3) Prices Probability Outcome Probability Outcome High 0.8 20 0.6 $10 Low 0.2 -$10 0.4 -$20

Explanation / Answer

Answer

The net prices probability , and associated outcomes ( in million of dollars) are given as,

therefore Expected profit

E(Profit)=E(Profit| High grades).P(High grade) + E(Profit| Low grades).P(Low grade)

=[ 20x0.8+(-10)x0.2]x0.7+[10x0.6+(-20)x0.4]x0.3

=9.2

As the expected profit is 9.2, South port should invest

So option d is the right one

Hence the answer...........

Thank you..........

High grade metallurgy p=0.7 Low grade metallurgy p=0.3 Price Probability Outcome Probability Outcome High 0.8 20 0.6 10 Low 0.2 -10 0.4 -20

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

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