A mining firm has the opportunity to purchase a license on a plot of land to mine for gold

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January 3rd, 2018

A mining firm has the opportunity to purchase a license on a plot of land to mine for gold. Consider the following financial information:• The investment cost to mine is $40M.• It costs $320 per ounce to mine gold.• The spot price of gold is $340 per ounce.• The licensing agreement provides exclusive rights for three years.• The historical volatility of gold prices is 20%.• The estimated gold reserve on the plot of land is 1.5M ounces.• The firm’s MARR is 12% and r = 6%.Determine the maximum amount the firm should pay for a license to mine for gold on the property in question, or, equivalently, what is the value of the gold mine today?

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