Two Mining Projects - Engineering Economy | ISYE 6225, Study Guides, Projects, Research of Systems Engineering

Download Two Mining Projects - Engineering Economy | ISYE 6225 and more Study Guides, Projects, Research Systems Engineering in PDF only on Docsity! Two Mining Projects A firm is investigating investment opportunities in two separate gold mines. Each mine may be leased for a period of 10 years; that is, at time t = 10 the operations of each mine are returned to the owner. Your consulting firm has been hired to assess the value of each project. The risk-free rate is 10%. Project I (Simplico Mine) 1. The maximum production rate is 10,000 ounces per year. 2. The production cost per ounce is 200. 3. In any year it is possible to shut down the mine and not produce. There is no cost to shutdown the mine, nor is there any cost to restart the mine. 4. The price of an ounce of gold follows a binomial lattice with u = 1.25 and d = 0.80. The time 0 price is 400. Gold is a commodity that is traded. 5. Cash flows for the year occur at the end of the year. Revenues are based on the price at the beginning of year t and are obviously known at time t. 6. At any time t it is possible to expand operations, as follows: (a) Production capacity will be instantaneously increased by 25%. (b) The unit cost increases by 20%. (c) The cost to expand is 4 million, which is billed at the time of expansion. (d) Only one expansion can take place during any year. Only one expansion can take place during the lease. Project II (Complexico Mine) 1. The mine is known to have a total capacity of 50,000 ounces. 2. The cost to mine zt ounces of gold for the upcoming year is C(xt, zt) := 500 z2t xt , (1) where xt denotes the amount of gold remaining in the mine at time t. Note x0 = 50, 000. 3. The production batch size is 1000 ounces. That is, the zt must be a multiple of 1000. 4. Cash flows for the year occur at the begin of the year. 1