There is an abandoned coal mine in U.S. An expert reportst that there might still have 10 million tonnes of coal in the mine and it will cost $100 million to reopen the mine. In Year 0 the $100 million will be spent and all CFs occur at the end of each year from Year 0-10. The price of coal is $56/tonne and the average production cost is $50/tonne at the end of Year 1. The annual prodution is 1 million tonnes and the nominal price of coal is expected to increase by 5% per year. The production cost is expected to increase at 4% each year, once initiated. the annualised SD is 30% and the risk free rate is 6%p.a..
(a) Assume that all CFs occur at the end of each year and the WACC rate is 10%. Use a valuation model to estimate the value of the mine using static NPV analysis.
(b) Use the black scholes option pricing model to estimate the value of the mine, showing your steps in details.
(c) Explain the difference between the 2 values calculated above.