Question

Hickock Mining is evaluating when to open a gold mine. The mine has 60,000 ounces of gold left that can be mined, and mining operations will produce 7,500ounces peryear. The required return on the gold mine is 12%, and it will cost $14million to open the mine. When the mine is opened, the company will sign a contract that willguarantee 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 $450 per ounce.I the company waits one year, there is a 60% probability that the contract price will generate an aftertax cash flow of $500 per ounce and a 40% probability that theaftertax cash flow will be $410 per ounce. What is the NPV in one year to wait, NPV today for waiting, What is the value of the option to wait.

Answer 1

Hickock Mining is evaluating when to open a gold mine. The mine has 60,000 ounces of gold left that can be mined, and mining operations will produce7,500ounces per year. The required return on the gold mine is 12%, and it will cost $14million to open the mine. When the mine is opened, the companywill 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 willgenerate an aftertax cash flow of $450 per ounce. I the company waits one year, there is a 60% probability that the contract price will generate anaftertax cash flow of $500 per ounce and a 40% probability that the aftertax cash flow will be $410 per ounce. What is the NPV in one year to wait, NPVtoday for waiting, What is the value of the option to wait.

BY USING EXCEL

return on the gold mine is 12%

PMT=0

NPER=1

60% probability
FV= 7,500 X$500 =3,750,00

VALUE OUTCOME--------3,348,214
===================

return on the gold mine is 12%

PMT=0

NPER=1

40% probability
FV= 7,500 X$500 =3,0750,000

VALUE OUTCOME--------2,745,535

What is the value of the option to wait.

ANSWER 2,745,535