Highland Mining and Minerals Company 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 $361,000 per year in years 5 through 15 and $555,000 per year in years 16 through 25. The U.S. gold mine will cost $2,020,000 and will produce $258,000 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

Highland Mining and Minerals Company 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 $361,000 per year in years 5 through 15 and $555,000 per year in years 16 through 25. The U.S. gold mine will cost $2,020,000 and will produce $258,000 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

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

See similar textbooks

Similar questions

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 $1,605,000 and will produce $370,000 per year in years 5 through 15 and $523,000 per year in years 16 through 25. The U.S. gold mine will cost $2,075,000 and will produce $327,000 per year for the next 25 years. The cost of capital is 6 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.) a-1. Calculate the net present value for each project. (Do not round intermediate calculations and round your answers to 2 decimal places.) a-2. Which investment should be made? multiple choice 1…
Highland Mining and Minerals Company is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,648,000 and will produce $338,000 per year in years 5 through 15 and $533,000 per year in years 16 through 25. The U.S. gold mine will cost $2,035,000 and will produce $275,000 per year for the next 25 years. The cost of capital is 12 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.) a-1. Calculate the net present value for each project. Note: Do not round intermediate calculations and round your answers to 2 decimal places. The Australian mine The U.S. mine Net Present Value a-2. Which…
Highland and Minerals Company is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,648,000 and will produce $325,000 per year in years 5 through 15 and $523,000 per year in years 16 through 25. The U.S. gold mine will cost $2,047,000 and will produce $253,000 per year for the next 25 years. The cost of capital is 11 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.) a-1. Calculate the net present value for each project. a-2. Which investment should be made? Australian mine U.S. mine b-1. Assume the Australian mine justifies an extra 2 percent premium over the normal cost of…
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,600. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,280, 5,080, 6,070, 7,060, and 7,900. The parent firm’s cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR/USD = 3.75. a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two dollar NPVs different or the same? multiple choice Different Same d. What is the NPV in dollars if the actual pattern of ZAR/USD exchange…
Micheal’s Machinery is a German multinational manufacturing company. Currently, Micheal’s financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment of $2000 and a cash inflow the following year of $2400. Micheal’s estimates that its risk-adjusted cost of capital is 12%. Currently, 1 U.S. dollar will buy 0.7 Germany. In addition, 1-year risk-free securities in the United States are yielding 6.5%, while similar securities in Germany’s are yielding 4.5%. If this project was instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project? Round your answers to two decimal places. What is the expected forward exchange rate 1 year from now? Round your answer to two decimal places. If Micheal undertakes the project, what is the net present value and rate of return of…
Your firm is based in southern Ireland (and thereby operates in euro, not pounds) and is considering an investment in the United States. The project involves selling widgets. It will last for 5 years with a required initial investment of $1,180,000. The project will generate after- tax cash flow of $349,200 every year for 5 years. At the end of the project, the equipment is projected to be sold for $190,000, leading to an additional cash flow at the end of year 5. The spot exchange rate is $1.50 €1.00. The cost of capital to the Irish firm for a domestic project of this risk is 8 percent. The U.S. inflation rate is 3 percent; the Irish inflation rate is 2 percent. (a) What is the equivalent $ cost of capital? (b) Determine the NPV of the project in $. (c) Calculate NPV in € assuming the PPP holds. (d) What would be the NPV in $ if the US inflation rate is 2% and Irish inflation rate is 3%? Please show your calculation for all the above questions. Otherwise the mark wouldn't be earned.
Deep Drill Inc. is evaluating a project to produce a high-tech deep-sea oil exploration device. The investment required is $80 million for a plant with a capacity of 15,000 units a year for 5 years. The device will be sold for a price of $12,000 per unit. Sales are expected to be 12,000 units per year. The variable cost is $7,000 and fixed costs, excluding depreciation, are $25 million per year. Assume Deep Drill employs straight-line depreciation on all depreciable assets, and assume that they are taxed at a rate of 36%. If the required rate of return is 12%, what is the approximate NPV of the project?
U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel roundbars that is expected to cost $14 million now and another $10 million 1 year from now. If total operating costs will be $1.5 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 10 to recover its investment plus a return of 18% per year?The company must make $______ million annually in years 1 through 10 to recover its investment plus a return of 18% per year
Imperial Motors is considering producing its popular Rooster model in China. This will involve an initial investment of CNY 4.1 billion. The plant will start production after one year. It is expected to last for five years and have a salvage value at the end of this period of CNY 501 million in real terms. The plant will produce 200,000 cars a year. The firm anticipates that in the first year, it will be able to sell each car for CNY 66,000, and thereafter the price is expected to increase by 4% a year. Raw materials for each car are forecasted to cost CNY 19,000 in the first year, and these costs are predicted to increase by 3% annually. Total labor costs for the plant are expected to be CNY 1.2 billion in the first year and thereafter will increase by 7% a year. The land on which the plant is built can be rented for five years at a fixed cost of CNY 301 million a year payable at the beginning of each year. Imperial's discount rate for this type of project is 14% (nominal). The…
U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $17 million now and another $10 million 1 year from now. If total operating costs will be $1.3 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 11 to recover its investment plus a return of 18% per year? The company must make $ million annually in years 1 through 11 to recover its investment plus a return of 18% per year.
U.S. Steel is considering a plant expansion to produce austenitic, precipitation hardened, duplex, and martensitic stainless steel round bars that is expected to cost $13 million now and another $10 million 1 year from now. If total operating costs will be $1.2 million per year starting 1 year from now, and the estimated salvage value of the plant is virtually zero, how much must the company make annually in years 1 through 10 to recover its investment plus a return of 15% per year?
An Australian company, GHI Ltd, is examining a potential investment in England. The project is expected to cost GBP 100 million and have a salvage value of GBP 30 million at the end of its 4-year life. Revenues generated from the project are based on estimated annual sales of 15 million units at a price of £12 each. Variable costs are expected to be £4 per unit and fixed costs are expected to be GBP 12 million per year. The current exchange rate of AUD = 0.58 GBP and the AUD is expected to depreciate at 5% pa over the life of the project. The required return is 12% in AUD. Calculate the NPV of the project and determine whether it should be undertaken.