(a) What is the NPV of the project if you extracted the gold immediately? Should you extract the gold or sell the mining rights? (4)

(b) What is the Real Option Adjusted NPV of the mining rights? Should you keep the option or sell the mining rights? (11)

Goldie Horn Ltd owns the mining rights for a gold field in Western Australia. The mine has been constructed, but extraction has not yet commenced. Goldie Horm owns the mining rights for the next five years. We have the following informatiorn The current spot price of gold is $28 per ounce The annualized standard deviation of percentage changes in the price of gold is 40% pa. The 3 month government bond rate is 6.00% pa. and the 10yr government bond rate is 6.5% The estimated gold reserve in Goldie Horn's mine is 1.2 million ounces Extraction can proceed at the rate of 100,000 barrels per month The forward market for gold is highly liquid; hence gold can be sold forward at fair value (which implies that, for the purposes of the option model, you can sell all the gold that you extract at the spot price as of the day you begin extraction) The existing mining equipment uses out-of-date technology resulting in extraction costs of $25/o . . . . unce * Before extraction can commence, startup costs of $6 million will be required to prepare the mining equipment for operation A competitor, Cape Hudson Bay Ltd, has offered Goldie Horn S8 million for the mining rights in their entirety Goldie Horn Ltd owns the mining rights for a gold field in Western Australia. The mine has been constructed, but extraction has not yet commenced. Goldie Horm owns the mining rights for the next five years. We have the following informatiorn The current spot price of gold is $28 per ounce The annualized standard deviation of percentage changes in the price of gold is 40% pa. The 3 month government bond rate is 6.00% pa. and the 10yr government bond rate is 6.5% The estimated gold reserve in Goldie Horn's mine is 1.2 million ounces Extraction can proceed at the rate of 100,000 barrels per month The forward market for gold is highly liquid; hence gold can be sold forward at fair value (which implies that, for the purposes of the option model, you can sell all the gold that you extract at the spot price as of the day you begin extraction) The existing mining equipment uses out-of-date technology resulting in extraction costs of $25/o . . . . unce * Before extraction can commence, startup costs of $6 million will be required to prepare the mining equipment for operation A competitor, Cape Hudson Bay Ltd, has offered Goldie Horn S8 million for the mining rights in their entirety