Problem:
The current price of gold is $400 per ounce. Colorado Gold Mines is planning to invest in a gold mine in Indonesia. The price of gold at the end of one year is expected to be $425 or $325. The cost of extracting the gold, including the development cost, is expected to be $375 and the first year output is expected to be 10,000 ounces.
Required:
Question: If the conditions are unfavorable the gold mine will be shut down. The risk free rate of interest is 5% find the value of the project.
Note: Please describe comprehensively and provide step by step solution.