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Hickock Mining is evaluating when to open a gold mine. The mine has 65,000 ounces of gold left that can be mined, and mining operations will produce 6,500 ounces per year. The required return on the gold mine is 12 percent, and it will cost $14 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 $441 per ounce. If the company waits one year, there is a 56 percent probability that the contract price will generate an aftertax cash flow of $491 per ounce and a 44 percent probability that the aftertax cash flow will be $401 per ounce.

Required:

What is the value of the option to wait?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M940614

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