The current price per ton of iron ore is $145.00.The effective lease rate is 3.0% and the risk free rate is 4.5%.The cost to mine one ton of iron ore is $110.00 and constant.What is the trigger price at which we will mine the iron ore?

Question

Quizplus · Accepted Answer

The trigger price is the price at which the revenue earned from selling one ton of iron ore equals the cost of mining one ton of iron ore plus the cost of the effective lease rate.

Let X be the trigger price.

Revenue earned = X * 1 ton = $145.00 * 1 ton = $145.00

Cost of mining one ton = $110.00
Cost of effective lease rate = 3.0% * X = 0.03X

Revenue earned = Cost of mining one ton + Cost of effective lease rate 
$145.00 = $110.00 + 0.03X

0.03X = $35.00

X = $35.00/0.03 = $1166.67 (This is the revenue earned by selling 8.08 tons of iron ore)

Therefore, the trigger price per ton of iron ore is X/8.08 = $163.80 (rounded to the nearest cent).

The Current Price Per Ton of Iron Ore Is $145