Question

STRIK-IT-RICH GOLD MINING COMPANY The Strik-it-Rich Gold Mining Company is a U.S. multinational firms and considering investing in a project in Germany. The cost of the investment project is €100 million. This cost occurs at the beginning of the year. The returning cash flow of this project is €120 million. Assume the returning cash flows happen at the end of the year. The firm’s cost of capital in the U.S. is 10%. The current exchange rate is S0($/€) = $1.20/€. Strik-it-Rich’s management is, however, concerned with the possibility that the exchange rate may change quit a bit because of the potential withdrawal of the United Kingdom from the European Union. The firm estimates that the exchange rate at the end of the year could either be S0($/€) = $1.00 or S0($/€) = $1.40.

(4) Instead of using call option contracts, the mining company can also use the real option. The exchange rate should become clear within a year. If the company has the option to delay this expansion plan for a year, please find the NPV after the company delays the expansion. Assume the exchange rate would not change in the next year.

Answer 1

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