Decision tree to summaries the dilemma faced by HBP

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HBP Mining Ltd (HBP) currently operates an iron ore mine and has commissioned GB to determine whether to continue operating the mine or to abandon it. The price of iron ore is currently $55 per ton, with the mine producing 80,000 tons of iron ore per year and costing $5 million per year to operate. In its current state, the mine has enough iron ore to continue operating for 90 years. Shutting the mine down would require HBP to bringing the land up to environmental standards, which is expected to cost $5 million. Reopening the mine once it is shut down would be an impossibility given current environmental standards.

HBP's risk management department believes that (given current economic conditions) the price of iron ore has an equal probability going up by 25%, and going down by 25% every year for the next three years. After three years, economic conditions will have stabilised so that the price of iron ore will remain constant for the remaining life of the mine. They have also estimated HBP's cost of capital to be 15%.

Question: Draw a decision tree to summaries the dilemma faced by HBP

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Reference no: EM131825496

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