What is the value of the silver mine

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Reference no: EM131864876

A silver mine has reserves of 25,000 troy ounces of silver. For simplicity, assume the following schedule for extraction, ore purification, and sale of the silver ore:

Extraction and Sale Date	Troy Ounces
Today	10,000
One Year from now	10,000
Two year from now	5,000

Also assume the following:

• The mine, which will exhaust its supply of silver ore in two years, is assumed to have no salvage value.

• There is no option to shut down the mine prematurely.

• The current price of silver is $4 per troy ounce.

• Today's forward price for silver settled one year from now is $4.20 per troy ounce.

• Today's forward price for silver settled two years from now is $4.50 per troy ounce.

• The cost of extraction, ore purification, and selling is $2 per troy ounce now and at any point over the next two years.

• The risk-free return is 5 percent per year.

What is the value of the silver mine?

Reference no: EM131864876

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