Question
It costs $60,000 to open the gold mine. If you open the mine, you can extract 1000 ounces of gold a year for each of
It costs $60,000 to open the gold mine. If you open the mine, you can extract 1000 ounces of gold a year for each of the next three years. You can close the mine one year from today by paying a cost of 5,000. The current gold price is equal to $400 an ounce. Each year the price is equally likely to rise/decrease by $60 from its level at the start of the year. The extraction cost is $350 an ounce. No fixed costs. The discount rate is 6% and no taxes. Cash flows happen at the beginning of the year. What is the NPV of opening the mine and closing after one year?
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