Question

When to harvest an existing asset: Anaconda Manufacturing Company currently owns amine that is known to contain a certain amount of gold. Since Anaconda does not have any gold-mining expertise, the company plans to sell the entire mine and base the selling price on a fixed multiple of the spot price for gold and have determined that the price will increase by 14 percent, 12 percent, 9 percent, and 6 percent during the next one, two, three, and four years, respectively. If Anaconda's opportunity cost of capital is 10 percent, what is the optimal time for Anaconda to sell the mine?

Answer 1

The rate of the gold price in Year 1 is 14% and Year 2 is 12% which is more than opportunity cost. So till at the end of Year 2, Anaconda Manufacturing Company should own this mine. But in Year 3 the gold rate is 9% which is less than the opportunity cost (10%).

Year 3 = 10% > 9%

So the optimal time for Anaconda Manufacturing Company to sell the mine is at the beginning of the third year or at the end of second year.

I hope this clear your doubt.

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