What is the value of the option to abandon the mine

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Reference no: EM131571264

You own a mine that extracts Smithsite ore. The mine currently has one year remaining, and will produce $20,000 tonnes of ore in this final year. The current price of the ore is 30.4 but this will either increase or decrease by 0.1 by the end of the year, and the ore will be sold at this random amount. The costs of operating the mine are $29 per tonne. The current discrete-time risk-free rate of return is 5%. What is the value of the option to abandon the mine? Explain the process.

Reference no: EM131571264

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