Excel Model (Involves @Risk and Decision Tree)
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Description
Experience Level: Expert
Estimated project duration: 1 day or less
I'm thinking about opening a gold mine. However, I don't know if it's a good idea. I've hired you as my consulting team to model the problem and tell me what to do as well as to identify the financial risks I face. The key information I have at hand to make the decision is:
Initial gold price: $1,300
Annual change in Gold price: average 4% and standard deviation 20% (normal)
Cost to open mine: $15,000,000 paid over 1 year
Annual fixed cost to keep mine open: $1,000,000 (not paid during opening years)
Years the mine will be open (after it opens): 10
Mining cost per ounce: $700
Costs and revenues hit my books at the beginning of the year with future years discounted at 8%
Total gold available (mine supply): between 30,000 and 50,000 ounces with the most likely outcome being 37,500 (triangular)
Annual gold yield is uniformly distributed between 4,000 and 6,000 ounces
At the beginning of the year I can decide whether or not to mine for gold.
Build an @Risk model based on the above details. Save this as a separate file before moving on!
Expand the basic model in two meaningful ways of your choice. In this case, meaningful should be thought of as taking a known input and converting it to an unknown random input or altering a distribution to be something more reasonable or adding some sort of flexibility to this (pricing a real option). You will need to find some sort of data to back up what you do.
For each model, only considering the average discounted profit, should I open the mine?
For each model, I can only afford to lose $10 million. How often will I lose more than that?
All things considered (based on expanded model), should I open the mine?
Notes:
I would like 2 separate files in it (details below the list):
Basic Model (Excel File)
Expanded Model (Excel File)
Attached are additional notes and the model that I have so far
Initial gold price: $1,300
Annual change in Gold price: average 4% and standard deviation 20% (normal)
Cost to open mine: $15,000,000 paid over 1 year
Annual fixed cost to keep mine open: $1,000,000 (not paid during opening years)
Years the mine will be open (after it opens): 10
Mining cost per ounce: $700
Costs and revenues hit my books at the beginning of the year with future years discounted at 8%
Total gold available (mine supply): between 30,000 and 50,000 ounces with the most likely outcome being 37,500 (triangular)
Annual gold yield is uniformly distributed between 4,000 and 6,000 ounces
At the beginning of the year I can decide whether or not to mine for gold.
Build an @Risk model based on the above details. Save this as a separate file before moving on!
Expand the basic model in two meaningful ways of your choice. In this case, meaningful should be thought of as taking a known input and converting it to an unknown random input or altering a distribution to be something more reasonable or adding some sort of flexibility to this (pricing a real option). You will need to find some sort of data to back up what you do.
For each model, only considering the average discounted profit, should I open the mine?
For each model, I can only afford to lose $10 million. How often will I lose more than that?
All things considered (based on expanded model), should I open the mine?
Notes:
I would like 2 separate files in it (details below the list):
Basic Model (Excel File)
Expanded Model (Excel File)
Attached are additional notes and the model that I have so far
Gene Y.
80% (1)Projects Completed
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14 May 2024
United States
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