Question

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to:

Answer 1

Answer:

$71,428.57

Explanation:

we can use the perpetuity formula to solve this question:

present value = future cash flow / (discount rate - g)

• future cash flow = $10,000
• discount rate = 6%
• g = growth rate = -8%

present value = $10,000 / (6% - - 8%) = $10,000 / 14% = $71,428.57