Highland Mining and Minerals Co. is considering the purchase of two gold mines.
ID: 2654975 • Letter: H
Question
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,630,000 and will produce $306,000 per year in years 5 through 15 and $572,000 per year in years 16 through 25. The U.S. gold mine will cost $2,012,000 and will produce $270,000 per year for the next 25 years. The cost of capital is 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)
Calculate the net present value for each project. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Which investment should be made?
Assume the Australian mine justifies an extra 1 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of cash flows. Calculate the new net present value given this assumption. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
rev: 11_12_2014_QC_58991
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,630,000 and will produce $306,000 per year in years 5 through 15 and $572,000 per year in years 16 through 25. The U.S. gold mine will cost $2,012,000 and will produce $270,000 per year for the next 25 years. The cost of capital is 10 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)
Explanation / Answer
Net Present Value of australian mine is 568775
4,37,899
Net present value oif the US mine = 437899
Investment should be made in Australian mine
Particulars Year Cash flows PVF @ 10% PV Initial Investment 0 1630000 1 16,30,000 Present value of cash outflows 16,30,000 Cash inflows 5 306000 0.6209 1,89,995 Cash inflows 6 306000 0.5645 1,72,737 Cash inflows 7 306000 0.5132 1,57,039 Cash inflows 8 306000 0.4665 1,42,749 Cash inflows 9 306000 0.4241 1,29,775 Cash inflows 10 306000 0.3855 1,17,963 Cash inflows 11 306000 0.3505 1,07,253 Cash inflows 12 306000 0.3186 97,492 Cash inflows 13 306000 0.2897 88,648 Cash inflows 14 306000 0.2633 80,570 Cash inflows 15 306000 0.2394 73,256 Cash inflows 16 572000 0.2176 1,24,467 Cash inflows 17 572000 0.1978 1,13,142 Cash inflows 18 572000 0.1799 1,02,903 Cash inflows 19 572000 0.1635 93,522 Cash inflows 20 572000 0.1486 84,999 Cash inflows 21 572000 0.1351 77,277 Cash inflows 22 572000 0.1228 70,242 Cash inflows 23 572000 0.1117 63,892 Cash inflows 24 572000 0.1015 58,058 Cash inflows 25 572000 0.0923 52,796 Present Value of cash inflows 21,98,775 Net Present Value 5,68,775Related Questions
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