Question
A gold mining company is searching for a new mine. They spend $10 million initially in survey attempts. There is a 40% chance that they
A gold mining company is searching for a new mine. They spend $10 million initially in survey attempts. There is a 40% chance that they can locate a suitable site using these surveys. If they cannot, they lose the initial investment. If they locate a site, they will begin digging in year 1. It will cost $100 million in year 1 and year 2 to explore the site. There is a 50% chance that after year 2, they have a productive mine generating $50 million a year for the next 15 years. There is a 30% chance they have a productive mine that generates $30 million a year for the next 10 years. There is a 20% chance the mine is a bust and they must abandon it for an additional $25 million in year 3. Draw the timeline and decision tree for the problem. Calculate the probabilities for all scenarios. What is the NPV if the discount rate is 12%? What is the NPV if the discount rate is 6%?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started