You are examining the financial viability of investing in some abandoned copper

mines in Chile, which still have significant copper deposits in them. A geologist

survey suggests that there might be 10 million pounds of copper in the mines still

and that the cost of opening up the mines will be $3 million (in present value

dollars). The capacity output rate is 400,000 pounds a year and the price of

copper is expected to increase 4% a year. The Chilean Government is willing to

grant a twenty-five year lease on the mine. The average production cost is expected to be 40 cents a pound and the current price per pound of copper is 87 cents (The production cost is expected to grow 2.5% a year, once initiated). The monthly standard deviation in copper prices is 7% and the twenty-five year bond rate is 7%.

Estimate the value of the mine based upon an option pricing model. Mark the correct answer.

The correct answer is: 905028 dollars. Please explain