HI everyone
I am stuck with this problem
Question:
Consider a gold mine with an estimated inventory of 1,000,000 pounds and a capacity output rate of 50,000 pounds per year. The price of gold is expected to grow 3% a year, after the first sale. The firm owns the right for this mine for the next 20 years. The cost of opening the mine is £10m and the average fixed production cost is £250 per pound. This production cost, once initiated, is expected to grow 5% per year. The standard deviation in gold prices is 20% and the current price of gold is £375 per pound. Given that the risk free rate is 9% and there is a one-year development lag in the project.
I would really appreciate the help
Jawad
I am stuck with this problem
Question:
Consider a gold mine with an estimated inventory of 1,000,000 pounds and a capacity output rate of 50,000 pounds per year. The price of gold is expected to grow 3% a year, after the first sale. The firm owns the right for this mine for the next 20 years. The cost of opening the mine is £10m and the average fixed production cost is £250 per pound. This production cost, once initiated, is expected to grow 5% per year. The standard deviation in gold prices is 20% and the current price of gold is £375 per pound. Given that the risk free rate is 9% and there is a one-year development lag in the project.
- Calculate the value of this real option.
- Comment on the mine’s value when compared to the standard capital budgeting
I would really appreciate the help
Jawad
