MGT3460Chapter17 - Should they? o Price of gold has fallen...

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Chapter 17 22:06 Mini Case Look at adjusted present value approach Depreciation and interest tax shield Benefits from concession loans that come into play Comes down to terminal value o What is value of the asset when you’re finished? Would anyone else buy it? For what purpose? o What would you do with the terminal value? Do this or that? o How to determine terminal value Minicase 2 – Timmins Mining Should I expand now or later? o Now – what happens? o Later – what happens? When is the best time to dig the hole? Go after oil/gas? o Timing the market When the market goes up/down Wait or do it now? Can’t determine the timing of the market – only luck However! Timing option can allow you to take advantage of pricing  options at a later date Timmins have been giving this timing option For $25k they can delay!
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Unformatted text preview: Should they? o Price of gold has fallen Price is not advantageous for Timmins Because of fixed cost payment upfront, you lose If increases, you are a big time winner o How do you value the $25k option? o If price goes to $310/oz Make profit first year [(310 - 225)*200/.10} -500 000 = $1.2M Worst case = -.2M (if price of gold falls) Only cost us 25K for the option. o What is the probability of the best case scenario? (291.50-240)/(310-240) = .7357 risk neutral = $832868 (equal likelihood across the whole range) win probability, depend on something o because I dont know that, Im willing to pay 25k for a chance to wait and find out super small amount for the outcomes of a choice. 22:06 22:06...
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This note was uploaded on 04/12/2010 for the course MGT 3460 taught by Professor Ebenezerasem during the Spring '10 term at University of Lethbridge.

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MGT3460Chapter17 - Should they? o Price of gold has fallen...

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