Hickock Mining is evaluating when to open a gold mine. The mine has 60.000 ounces of gold left that can be mined, and mining operations will produce 7.500 ounces per year. The required return on the gold mine is 12 percent, and It will cost $14 minion to open we mine. Wien we mine is opened, the company will sign a contract What win guarantee We price for gold foe We remaining life of the mine. If the mine is opened today, each ounce of gold will generate an after tax cash flow of $450 per ounce. If We company waits one year, there Is a 60 percent probability that We contract price will generate an after tax cash flow of $500 per ounce and a 40 percent probability that We after tax cash flow will be $410 per ounce. What Is We value of the option to wait? No not use a comma In your numerical answer. The after tax cash flow per year If we mine s opened today s CF = (7.500)|$450) = $3,375,000 per yea' to' 8 years. Calculate the NPV given we mine is open today. The aftertax cash flow per year If we mine 5 open In o-e year Price increase CF = (7.5C0)($500) = $3,750. 000 per year 'or 8 years with 60 percent probability Price decrease CF = (7.500)|$410) = $3,074,000 per year for 8 years with 40 percent probability First calculate we PV of these cash flows In Year 1. Calculate NPV In Year 1 given We the PVs of we Price increase and Price decrease.. Discount the NPV In Year 1 Pack one yea' to Year 0. Calculate Value o' the Option to Wait (see HM #1). We can calculate the value of we option to wait as the deference between the NPV of opening we mine today and the NPV of waiting one year to open the mine. The life of the mine is 60.000 ounces / 7.500 ounces per year = 8 years This win be true no matter when the company opens we mine. Hickock Mining is evaluating when to open a gold mine. The mine has 60.000 ounces of gold left that can be mined, and mining operations will produce 7.500 ounces per year. The required return on the gold mine is 12 percent, and It will cost $14 minion to open we mine. Wien we mine is opened, the company will sign a contract What win guarantee We price for gold foe We remaining life of the mine. If the mine is opened today, each ounce of gold will generate an after tax cash flow of $450 per ounce. If We company waits one year, there Is a 60 percent probability that We contract price will generate an after tax cash flow of $500 per ounce and a 40 percent probability that We after tax cash flow will be $410 per ounce. What Is We value of the option to wait? No not use a comma In your numerical answer. The after tax cash flow per year If we mine s opened today s CF = (7.500)|$450) = $3,375,000 per yea' to' 8 years. Calculate the NPV given we mine is open today. The aftertax cash flow per year If we mine 5 open In o-e year Price increase CF = (7.5C0)($500) = $3,750. 000 per year 'or 8 years with 60 percent probability Price decrease CF = (7.500)|$410) = $3,074,000 per year for 8 years with 40 percent probability First calculate we PV of these cash flows In Year 1. Calculate NPV In Year 1 given We the PVs of we Price increase and Price decrease.. Discount the NPV In Year 1 Pack one yea' to Year 0. Calculate Value o' the Option to Wait (see HM #1). We can calculate the value of we option to wait as the deference between the NPV of opening we mine today and the NPV of waiting one year to open the mine. The life of the mine is 60.000 ounces / 7.500 ounces per year = 8 years This win be true no matter when the company opens we mine
