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23 marks

You own a copper mine. The price of copper is currently $1.50 per pound. The mine produces 1 million pounds of copper per year and costs $2million per year to operate. It has enough copper to operate for 100 years. Shutting the mine down would entail bringing the land up to environmental standards and is expected to cost $5million. Reopening the mine once it is shut down would be an impossibility given current environmental standards. The price of copper has an equal (and independent) probability of going up down by 25% each year for the next two years and then will stay at that level forever. Calculate the NPV of continuing to operate the mine if the cost of capital is fixed at 15%. Is it optimal to abandon the mine or keep it operating?