Question

Hickock Mining is evaluating when to open a gold mine. The mine has 40,000 ounces of gold left that can be mined, and mining operations will produce 5,000 ounces per year. The required return on the gold mine is 10 percent, and it will cost $33.0 million to open the mine. When the mine is opened, the company will sign a contract that will guarantee the price of gold for the remaining life of the mine. If the mine is opened today, each ounce of gold will generate an aftertax cash flow of $1,300 per ounce. If the company waits one year, there is a 55 percent probability that the contract price will generate an aftertax cash flow of $1,500 per ounce and a 45 percent probability that the aftertax cash flow will be $1,200 per ounce. What is the value of the option to wait? (Enter your answer in dollars, not millions of dollars, e.g.. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Option value

Answer 1

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| 0 = e ạ , 3 g W ( 2 v * 02-28 ENG 01-02-2020 24 X C79 fe B C D E F G H J ка THE REMAINING LIFE OF MINE 8 YEARS [40000/5000] IF MINE IS OPENED TODAY CASHFLOW PER YEAR 6500000 (1300 X 5000] NPV OF OPENING MINE TODAY NPV = PRESENT VALUE OF CFAT - INVESTMENT 6500000 X PVIFA @11%, 9 YEARS - 33000000 6500000 X 5.334926 - 33000000 NOTE PVIFA @10%, 8 YEARS (1/r)*(1-(1/(1+r)^n)) (1/0.10)*(1-(1/(1+0.10)^8)) 5.334926 1677020.29 A IF MINE IS OPENED AFTER A YEAR CASHFLOW WILL BE CASHFLOW WILL BE PROB 55% 45% 7500000 [=1500*5000] 6000000 [=1200*5000) PRESENT VALUE OF CASH FLOW PV 7500000 X PVIFA@10%, 8 YEARS 6000000 X PVIFA@10%, 8 YEARS 7500000 X 5.334926 = 6000000 X 5.334926 = 101 102 PV PROB PV * PROB 40011946.48 55% 22006570.57 32009557.19 45% 14404300.73 36410871.30 EXPAND FROS SUN MERGER Sheet6 HICKOCK ... distress BRIGHAN CAP GAIN Sheet1 call put bilbo MINT SENSITIVITY m.v.p. DISNEY BI... :

| 0 = e ạ , 3 g W ( 2 v * 02-29 ENG 01-02-2020 24 X 0115 fix X AB E F G H K L IF MINE IS OPENED AFTER A YEAR PROB 55% CASHFLOW WILL BE CASHFLOW WILL BE 7500000 [=1500*5000] 6000000 [=1200*5000] 45% PRESENT VALUE OF CASH FLOW 7500000 X PVIFA@10%, 8 YEARS 6000000 X PVIFA@10%, 8 YEARS PV 7500000 X 5.334926 = 6000000 X 5.334926 = PV 40011946.48 32009557.19 PROB PV * PROB 55% 22006570.57 45% 14404300.73 36410871.30 104 105 NPV IF OPENED IN ONE YEAR NPV = PRESENT VALUE OF CFAT - INVESTMENT 36410871.30 - 33000000 = 3410871.30 AND NPV TODAY NPV TODAY = 3410871.30/1.10 = 3100792.09 B VALUE OF OPTION TO WAIT 1423771.81 B-A 112 113 114 115 os | BRIGHAN CAP CAN | she call our bibo | MOT | SENSITIVITY EXPAND FROS SUR MERGER | Shoek Hicxock mup.DER ... distress BRIGHAN CAP GAIN Sheet1 call put bilbo MINT SENSITIVITY EXPAND FROS SUN MERGER Sheet6 HICKOCK m.v.p. DISNEY BI... :