Question

4. Hickock Mining is evaluating when to open a gold mine. The mine has 33,600 ounces of gold left that can be mined and mining operations will produce 4,200 ounces per year. The required return on the gold mine is 12% and it will cost $17.4 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 will generate an after-tax cash flow of $900 per ounce. If the company waits one year, there is a 60% probability that the contract price will generate an after-tax cash flow of $1,150 per ounce and a 40% probability that the after-tax cash flow will be $700 per ounce. What is the value of the option to wait?

Answer 1