Calculation of net present value of decision making

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Calculation of Net Present Value of decision making

Acme Mining Company is considering digging a new copper mine. The mining equipment will cost $625 today, and in one year it will be known whether or not there is copper at the site and, therefore, whether the mine is a success of failure. The mining engineers estimate a 60% chance of success and the financial staff has calculated the PV at t =1 of a successful mine to be $1,000 and the PV of a failure at t = 1 to be $0. The financial staff uses a discount rate of 10%.

a. Calculate the NPV today using a traditional NPV analysis. Would you accept or reject the project?

b. Assume the financial staff has determined that if the project is a failure, the mining equipment could be sold for $400 at t=1. When you include this abandonment option, what is the NPV of the project? Would you accept or reject

c. Based on your answers to a. and b, calculate the value of the option to abandon.

Reference no: EM1312860

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