Question
Discussion Topic MINI CASE (p. 478): STRIK-IT-RICH GOLD MINING COMPANY The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will
Discussion Topic
MINI CASE (p. 478): STRIK-IT-RICH GOLD MINING COMPANY
The Strik-it-Rich Gold Mining Company is contemplating expanding its operations. To do so it will need to purchase land that its geologists believe is rich in gold. Strik-it-Richs management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year.
The expansion, including the cost of the land, will cost $2,500,000. The current price of gold bullion is $1,400 per ounce and one-year gold futures are trading at $1,484 = $1,400(1.06).
Extraction costs are $1,050 per ounce. The firms cost of capital is 10%. At the current price of gold, the expansion appears profitable: NPV = ($1,400 1,050) x 2,000/.10 - $2,500,000 = $4,500,000.
Strik-it-Richs management is, however, concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $1,100 for the foreseeable future. On the other hand, management believes there is some possibility that the world will soon return to a gold reserve international monetary system. In the latter event, the price of gold would increase to at least $1,600 per ounce.
The course of the future price of gold bullion should become clear within a year. Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $250,000.
What should Strik-it-Richs management do? Include in your discussion an analysis of how NPV would be affected if the price of gold were to rise or fall significantly. Is buying a purchase option on the land a good idea? Why or why not?
Post your response in the Discussion Forum below. Click "Create Thread" to make your initial post.
Expectations: Your first weekly post should be made no later than Wednesday of the week. It should be intuitive, thoughtful, and properly documented with supporting references using proper APA style (in-text citations AND a reference list). Your minimum oftwoadditionalposts toclassmatesshould be done on separate days between Thursday and Sunday. These responses to other posts should also be well-written, thorough, and professional. The week closes on Sunday at 11:59 PM and you will no longer have access to the discussion.
EACH POST FOR THE DISCUSSION SHOULD BE AT LEAST 1 PARAGRAPH IN LENGTH (150 words). Quantity is IMPORTANT BUT QUALITY is just as important. Say something deep & intuitive, don't just rephrase something you read or another student's posting. Also remember the MINIMUM number of substantial posts each week is 3, but a MINIMUM effort will not earn a 100%. You need to go a bit beyond minimum for that.Support your writing with proper APA style documentation -- ALWAYS.
Discussion Grading Criteria:
(40) Thoroughly answered all questions(10) Original post by Wednesday(20) Quality of responses to at least two classmates (more is better!)(10) References to text and/or other sources(10) Spelling & grammar at college level(10) Posted onseparate daysTOTAL: 100 points
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