Real options A silver mine can yield 10,000 ounces of silver at a variable cost of $32 per ounce. The fixed costs of owning the mine are $40,000 per year regardless of whether the mine is open or closed. In half the years, silver can be sold for $48 per ounce; in the other years, silver can be sold for only $24 per ounce. Ignore taxes.
a. What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined?
b. Now suppose you can costlessly shut down the mine in years of low silver prices. What happens to the average cash flow from the mine?