Question
You own a silver mine. The price of silver is currently $625 per kilogram (kg). The mine produces 7,500 kg of silver per year and
You own a silver mine. The price of silver is currently $625 per kilogram (kg). The mine produces 7,500 kg of silver per year and costs $4.25 million per year to operate. It has enough silver to operate for 40 years. Shutting the mine down would entail bringing the land up to environmental standards and will cost $5 million. Reopening the mine once it is shut down would be an impossibility given current environmental standards. The price of silver has an equal (and independent) probability of going up or down by 15% each year for the next two years and then will stay at that level for the remaining life of the mine. Calculate the NPV of continuing to operate the mine (as of today) if the cost of capital is fixed at 10%. Is it optimal to abandon the mine or keep it operating?
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