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Hickok Mining is evaluating when to open the gold mine. The mine has 37,100 ounces of gold left that can be mined, and mining operations will produce 5,300 ounces per year. The required return on the gold mine is 10 percent, and it will cost $33.3 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 make an after tax cash flow of $1,330 per ounce. If the company waits one year, there is a 55 percent possibility that the contract price will generate an after tax cash flow of $1,530 per ounce and a 45 percent probability that the after tax cash flow will be $1,230 per ounce.

Problem1. What is the value of the option to wait?

Problem2. L.J.’s Toys Inc. just bought a $405,000 machine to produce toy cars. The machine will be fully depreciated by straight-line method over its five-year economic life. Each toy sells for $25. The variable cost per toy is $11, and the firm acquires fixed costs of $283,000 each year. The corporate tax rate for the company is 34 percent. The proper discount rate is 12 percent. What is the financial break-even point for project?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M93475

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