Part 2 (13 marks): Assume instead of distributing the cash to shareholders, the company is also considering a business project to construct a gold mine. The profitability of the project depends on the future gold price. The license to construct and operate the gold mine has been granted, which comes with the condition that it cannot be sold to another party. But the company can cease digging if it desires. And any potential loss from the gold mine is tax-deductible. The license will expire in two years, so the company can either construct the mine now or one year later. The cost to construct the mine is $10 million. Suppose the gold price for next year is uncertain and can be either $1,600/once with a probability of 60% or $1,100/once with a probability of 40%. The price will stay constant afterwards into the future. The fixed costs, including the annual license fee and lease payments, are $650,000 per year, which are due even if the mine is not in operation. The variable production costs are $1,200/once. Ignore all other costs. The company can choose to construct the gold mine today or in one year's time after the gold price is revealed. The mine is expected to produce 10,500 ounces of gold per year, one year after it is constructed until perpetuity. Assume all capital and operating costs remain unchanged. The corporate tax rate is 30% and the appropriate cost of capital is 10%. (c) What is the type of the real option as mentioned above? (d) Draw the decision tree diagram to show all possible decisions and scenarios. Denote the decision nodes and information nodes using different shapes as in the lecture slides. Mark the time as well as the possible scenarios with corresponding decision options. You are required to calculate the NPVs in the next two questions so in the decision tree, you can use notations such as NPV, or NPV2 when necessary. (e) Calculate the expected NPV of the project at t=0 using after-tax cash flows if the company decides to construct the mine today. (f) Calculate the expected NPV of the project at t=0 using after-tax cash flows if the company constructs the gold mine one year later. (g) Compare your results in (e) and (f), and make a recommendation to the company as when it should construct the gold mine