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 investment should be made? O Australian mine OUS, mine b-1. Assume the Australian mine justifies an extra 2 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. Note: Negative amount should be indicated by a minus sion. Do not round intermediate calculations and round your answer to 2
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 investment should be made? O Australian mine OUS, mine b-1. Assume the Australian mine justifies an extra 2 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. Note: Negative amount should be indicated by a minus sion. Do not round intermediate calculations and round your answer to 2
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 12P
Related questions
Question
Transcribed Image Text: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 investment should be made?
O Australian mine
OU.S. mine
b-1. Assume the Australian mine justifies an extra 2 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.
Note: Negative amount should be indicated by a minus sion. Do not round intermediate calculations and round your answer to 2
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