Discuss on opening the mine now or one year later using npv

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Reference no: EM1311651

Discuss on opening the mine now or one year later using NPV analysis.

You own an unused gold mine that will cost $100,000 to reopen. If you do open the mine, you expect to extract 1,000 ounces of gold per year, for the next 3 years. After those 3 years the deposit will be exhausted. An ounce of gold is currently selling for $500. For each of the next 3 years, this price is equally likely to rise or fall by $50 per year from its level at the start of that year. The extraction cost is estimated to be around $460 an ounce, and this cost will not change over the next 3 years.

The demand for gold has increased tremendously in the recent years and there is a good chance that this demand will continue in the future as well. You are therefore puzzled as to whether to open the mine now or in one year in the hope that prices will move further up.

Assume that the opportunity cost of the project is 10%.

What is the NPV of opening the mine now? What is the NPV of opening the mine one year later? Should you wait?

Reference no: EM1311651

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