The Strik-it-Rich Gold Mining Company is contemplating expanding its operations.To do so it will need to purchase land that its geologists believe is rich in gold.Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year.The expansion,including the cost of the land,will cost $500,000.The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 × (1.06).Extraction costs are $375 per ounce.The firm's cost of capital is 10 percent.
Strik-it-Rich's management is,however,concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future.On the other hand,management believes there is some possibility that the world will soon return to a gold reserve international monetary system.In the latter event,the price of gold would increase to at least $460 per ounce.The course of the future price of gold bullion should become clear within a year.Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000.
Compute the NPV at the current price of gold.Hint: think of the gold mine as a perpetuity.

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The Answer of The Strik-it-Rich Gold Mining Company is contemplating expanding its operations.To do so it will need to purchase land that its geologists believe is rich in gold.Strik-it-Rich's management believes that the expansion will allow it to mine and sell an additional 2,000 troy ounces of gold per year.The expansion,including the cost of the land,will cost $500,000.The current price of gold bullion is $425 per ounce and one-year gold futures are trading at $450.50 = $425 × (1.06).Extraction costs are $375 per ounce.The firm's cost of capital is 10 percent.
Strik-it-Rich's management is,however,concerned with the possibility that large sales of gold reserves by Russia and the United Kingdom will drive the price of gold down to $390 for the foreseeable future.On the other hand,management believes there is some possibility that the world will soon return to a gold reserve international monetary system.In the latter event,the price of gold would increase to at least $460 per ounce.The course of the future price of gold bullion should become clear within a year.Strik-it-Rich can postpone the expansion for a year by buying a purchase option on the land for $25,000.
Compute the NPV at the current price of gold.Hint: think of the gold mine as a perpetuity.

The Strik-It-Rich Gold Mining Company Is Contemplating Expanding Its Operations