Option to Abandon You own an unused gold mine that will cost $800,000 to reopen. If you
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Option to Abandon You own an unused gold mine that will cost $800,000 to reopen. If you open the mine, you expect to be able to extract 1,000 ounces of gold a year for each of three years. After that, the deposit will be exhausted. The gold price is currently $2,000 an ounce, and each year the price is equally likely to rise or fall by $100 from its level at the start of the year. The extraction cost is $920 an ounce and the discount rate is 14 per cent.
(a) Should you open the mine now or delay one year in the hope of a rise in the gold price?
(b) What difference would it make to your decision if you could costlessly (but irreversibly) shut down the mine at any stage?
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