# A mining company is evaluating when to open a gold mine. The mine has 100,000 ounces of gold left that can be mined and mining operations

###### Question:

## Answers

The value of the option to wait today = $2,500,000

Explanation:

a) Data and Calculations:

Quantity of gold left in the mine = 100,000 ounces

Quantity of gold to be produced yearly = 10,000 ounces

Estimated life of mine = 10 years (100,000/10,000)

After-tax cash flow if mine is opened today = $1,300 per ounce

After-tax cash flow if mine is opened a year later:

Expected value = ($1,550 * 70%) + ($1,200 * 30%) = $1,325 per ounce

Comparison of the values of opening options:

Mine opened Mine opened

today a year later

After-tax cash flow per ounce $1,300 $1,325

Quantity of gold in the mine 100,000 100,000

Total after-tax cash flows $130,000,000 $132,500,000

Cost of opening mine 30,000,000 30,000,000

Required return (15%) 4,500,000 4,500,000

Actual returns from mine $100,000,000 $102,500,000

Therefore, the value of option to wait:

Returns from mine opened next year = $102,500,000

Returns from mine opened today = 100,000,000

Value of the option to wait today = $2,500,000

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