A gold mine will produce all of its output two years from now The mine has a reserve of 100 pounds of gold The gold can be

extracted at no cost and sold in year 2 $10,000 per pound today.

In year 2. gold price will be either $14,000 per pound, or $8,000 per pound

The one-year risk-free rate is 10% The risk-free rate will remain at 10% next year too.

a) What is the value of the gold mine today'?

b) Suppose that the mine owner receives today an offer for the mine for $1.1 million. The offer is valid for two

years and the mine owner can wait until year two and decide whether to take the offer or keep operating the mine himself

after observing the year-2 gold price What is the value of the mine today'

c) Now suppose that there is some uncertainty about the reserves of the mine The mine's reserves are either 100

pounds or zero, with each outcome equally likely. In year 1, the mine owner will leam whether the reserves are 100 pounds

or zero. Suppose that the mine owner receives an offer today for the mine that is conditional on the reserv es The bidder

offers $1.1 million if reserves prove to be 100 pounds, but only $55,000 if the reserve turns out to be zero In either case,

the payment is to be received m year 2 if the offer is accepted Value the mine now.