Forward prices for gold, in dollars per ounce, for the next five years are 305, 333, 360, 388, and 425, respectively. A mine can be opened for 3 years at a cost of $600. Annual mining costs are a constant $100 and interest rates are 5.0%. When should the mine be opened to maximize NPV?
A) Year 1
B) Year 2
C) Year 3
D) Never

Question

Quizplus · Accepted Answer

The mine should be opened in Year 3. The NPV is maximized when the mine is opened in Year 3 because the forward prices are highest in the last three years (360, 388, 425), and the present value of these cash flows, minus the costs, is greater than opening in any other year.

Forward Prices for Gold, in Dollars Per Ounce, for the Next