You own land in Kenya on which five tanzanite mines can be constructed. Each mine costs 20 million Kenyan schillings (KS)

and will yield either 1,000 or 2,000 carats (ct) of tanzanite with equal probability. The tanzanite will be either medium-quality

(worth KS 20,000 per carat) or high-quality (worth KS 40,000 per carat) with equal probability. The quality of tanzanite in each mine is independent of the quantity. Variable production costs are KS10,000/ct. All the tanzanite will be extracted in the first year of operation, after which the mines will be worthless. There are no exit costs. The appropriate discount rate is 0 percent per year. The government has agreed to a zero tax rate.

a. Calculate the NPV of investing in all five mines as a “now-ornever” alternative.

b. Rather than investing in all five mines today, you can invest in one mine and base subsequent investment on the outcome of that mine. The price and quantity of the four additional mines will be known with certainty once the exploratory mine is operational. Find the NPV of investing in one mine and then waiting one year before considering the other four mines.

c. Is there an opportunity cost to investing in all five mines today? If so, how much is it?