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:

A) $71,429

B) $500,000

C) $166,667

D) This problem cannot be solved

Question

Business

Brenden Barnes

12 January, 11:15

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:

A) $71,429

B) $500,000

C) $166,667

D) This problem cannot be solved

+2

Answers (1)

Know the Answer?

Martha Gonzalez · Answer 1

The correct answer is C.

Explanation:

Giving the following information:

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year.

The appropriate interest rate is 6%, then the value of this mining operation.

We need to use the formula of a perpetual annuity:

PV = Cf/i

PV = 10,000/0.06 = $166,666.67