STRIK-IT-RICH GOLD MINING COMPANY The Strik-it-Rich Gold Mining Company is a U.S. multinational firms and considering...

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STRIK-IT-RICH GOLD MINING COMPANY The Strik-it-Rich Gold MiningCompany is a U.S. multinational firms and considering investing ina project in Germany. The cost of the investment project is €100million. This cost occurs at the beginning of the year. Thereturning cash flow of this project is €120 million. Assume thereturning cash flows happen at the end of the year. The firm’s costof capital in the U.S. is 10%. The current exchange rate is S0($/€)= $1.20/€. Strik-it-Rich’s management is, however, concerned withthe possibility that the exchange rate may change quit a bitbecause of the potential withdrawal of the United Kingdom from theEuropean Union. The firm estimates that the exchange rate at theend of the year could either be S0($/€) = $1.00 or S0($/€) =$1.40.
(4) Instead of using call option contracts, the mining companycan also use the real option. The exchange rate should become clearwithin a year. If the company has the option to delay thisexpansion plan for a year, please find the NPV after the companydelays the expansion. Assume the exchange rate would not change inthe next year.

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STRIK-IT-RICH GOLD MINING COMPANY The Strik-it-Rich Gold MiningCompany is a U.S. multinational firms and considering investing ina project in Germany. The cost of the investment project is €100million. This cost occurs at the beginning of the year. Thereturning cash flow of this project is €120 million. Assume thereturning cash flows happen at the end of the year. The firm’s costof capital in the U.S. is 10%. The current exchange rate is S0($/€)= $1.20/€. Strik-it-Rich’s management is, however, concerned withthe possibility that the exchange rate may change quit a bitbecause of the potential withdrawal of the United Kingdom from theEuropean Union. The firm estimates that the exchange rate at theend of the year could either be S0($/€) = $1.00 or S0($/€) =$1.40.(4) Instead of using call option contracts, the mining companycan also use the real option. The exchange rate should become clearwithin a year. If the company has the option to delay thisexpansion plan for a year, please find the NPV after the companydelays the expansion. Assume the exchange rate would not change inthe next year.