# Ca final nov 2004 risk analysis problem-doubt

(Guest)

Since I am doing the studies without any coaching i am finding it tough in some FM problems. I would very much appreciate if any one can explain me the concept of solving the below mentioned problem --2nd and 3rd part only

Question 1
You own an unused Gold mine that will cost Rs. 10,00,000 to reopen.  If you open the
mine, you expect to be able to extract 1,000 ounces of Gold a year for each of three years.
After that the deposit will be exhausted. The Gold price is currently Rs. 5,000 an ounce, and
each year the price is equally likely to rise or fall by Rs. 500 from its level at the start of year.
The extraction cost is Rs.4,600 an ounce and the discount rate is 10 per cent.
Required:
(a) Should you open the mine now or delay one year in the hope of a rise in the Gold price?
(b) What difference would it make to your decision if you could costlessly (but irreversibly)
shut down the mine at any stage?  Show the value of abandonment option.

(P.S Please explain the procedure and logic to solve the problem)

John John