Estimate value of right to mine base on option-pricing model

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You are examining the financial viability of investing in some abandoned copper mines in Chile, which still have significant copper deposits. A geologist survey suggests that there might still be 10 million pounds of copper in the mines and the cost of opening up the mines will be $2 million. The Chilean government is willing to grant a 25-year lease on the mine. At the current copper price, the present value of the net cash flows from this mine is $1.8m. However, the annualized standard deviation in copper prices is 25%, and the risk free rate is 7%. Estimate the value of right to the mine based on an option-pricing model.

Reference no: EM13863942

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