Barrick Gold, an Australian gold mining company, is considering re-opening a gold mine at a...
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Barrick Gold, an Australian gold mining company, is considering re-opening a gold mine at a cost of $48 million. The re-opening costs are expected to remain constant over time. If the company re-opens the mine today, it can enter into a hedging agreement and secure a net cashflow of $14 million per annum for 5 years. If the company re-opens the mine in one year from now, the company expects to secure a net cashflow of $12 million or $20 million per annum for 5 years with equal probability. Assume the net cashflow starts exactly 1 year after the mine re-opens, and the appropriate cost of capital is 10% per annum. Using the approach discussed in the lecture, the value of the option to postpone the project by one year is closest to (ignore taxes): None of the other answers. O $5.1 million O $6.4 million O $7.6 million
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