The current price of gold is $400. The risk-free rate is 10% and the annual volatility for changes in gold prices is 30%. Gold prices are assumed to follow a lognormal distribution. Each year the mine is open a fixed cost of $1 million is incurred. This cost is incurred even if no gold is mined during the year. If we open
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
The current price of gold is $400. The risk-free rate is 10% and the annual volatility for changes in gold prices is 30%. Gold prices are assumed to follow a lognormal distribution. Each year the mine is open a fixed cost of $1 million is incurred. This cost is incurred even if no gold is mined during the year. If we open (or re-open) the mine a cost of $2 million is incurred. If we shut the mine a fixed cost of $1.5 million is incurred. During the current year and each of the next 15 years we can, if the mine is open, mine up to 10,000 ounces of gold at a variable cost of $250 per ounce. What is the worth of this situation? Assume the mine is open at the beginning of year 1.
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