Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 17P
a.
Summary Introduction
To determine : The investment to be made by Highland Mining and Minerals Co.
Introduction:
It is the difference between the PV (present value) of
Deferred
A contract that helps an investor to delay his incomes from receiving it until a desirable time for receiving that income, is termed as a deferred annuity. It is divided into two phases. During the saving phase which comes first, an investor only deposits money in the deferred annuity account. During the earning phase which follows the first phase, the investors start receiving payments. The payments can be fixed or variable.
b.
Summary Introduction
To calculate: The investment that should be made by Highland Mining and Minerals Co. if the discount rate is increased by 2% for Australian Gold Mine.
Introduction:
Net present value (NPV):
It is the difference between the PV (present value) of cash inflows and the PV of cash outflows. It is used in capital budgeting and planning of investment to assess the benefits and losses of any project or investment.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these 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.) Â
Â
   a-2. Which investment should be made? Â
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 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
Chapter 13 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 13 - Prob. 1DQCh. 13 - Discuss the concept of risk and how it might be...Ch. 13 - When is the coefficient of variation a better...Ch. 13 - Explain how the concept of risk can be...Ch. 13 - If risk is to be analyzed in a qualitative way,...Ch. 13 - Assume a company, correlated with the economy, is...Ch. 13 - Assume a firm has several hundred possible...Ch. 13 - Explain the effect of the risk-return trade-off on...Ch. 13 - What is the purpose of using simulation analysis?...Ch. 13 - Assume you are risk-averse and have the following...
Ch. 13 - Myers Business Systems is evaluating the...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Possible outcomes for three investment...Ch. 13 - Prob. 7PCh. 13 - Prob. 8PCh. 13 - Prob. 9PCh. 13 - Prob. 10PCh. 13 - Prob. 12PCh. 13 - Waste Industries is evaluating a 70,000 project...Ch. 13 - Prob. 14PCh. 13 - Debby’s Dance Studios is considering the...Ch. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Allison’s Dresswear Manufacturers is preparing a...Ch. 13 - Prob. 20PCh. 13 - Prob. 21PCh. 13 - Prob. 22PCh. 13 - Ms. Sharp is looking at a number of different...Ch. 13 - Prob. 25P
Knowledge Booster
Similar questions
- 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…arrow_forwardLeonard, a company that manufactures explosionproof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $900,000 now and $560,000 two years from now, with annual M&O costs of $79,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $280,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company’s MARR of 20% per year. (Note: Check out the spreadsheet exercises for new options that Leonard has been offered recently.)arrow_forwardAn 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.arrow_forward
- Leonard, a company that manufactures explosion-proof motors, is considering two alternatives for expanding its international export capacity. Option 1 requires equipment purchases of $940,000 now and $435,000 two years from now, with annual M&O costs of $70,000 in years 1 through 10. Option 2 involves subcontracting some of the production at costs of $230,000 per year beginning now through the end of year 10. Neither option will have a significant salvage value. Use a present worth analysis to determine which option is more attractive at the company's MARR of 14% per year. The present worth of option 1 is $ -1621119.5 and that of option 2 is $ -1384324 Option 2 is more attractive.arrow_forwardMasada Energy is considering setting up a bottling plant in Namibia or Zimbabwe. The project is mutually exclusive project. The project requires R150 million. The WACC is 9% in Namibia and 11% in Zimbabwe. The corporate tax is 25% in Namibia and 30% in Zimbabwe. The company will depreciate the projects at 20% per annum in both countries. The company expect not residual value at the end of the projects in either countries. The management has provided you with the following expected cash flows from each of the countries under consideration. NAMIBIAN CASHFLOWS YEAR 1-5 1 2 3 4 5   R52,000,000 R44,670,000 R87,500,000 R78,000,000 R98,750,000     ZIMBABWEAN CASHFLOWS YEAR 1-5 1 2 3 4 5 R40,600,000 R56,000,600 R60,700,000 R82,000,000 89,000,000   As the Finance Director at Masada, you have tasked by the board to evaluate these projects and advise them which of the project the company must undertake.arrow_forwardU.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 yeararrow_forward
- 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…arrow_forwardU.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 $1.4 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 23% per year? The company must make S million annually in years 1 through 11 to recover its investment plus a return of 23% per year.arrow_forwardU.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?arrow_forward
- 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…arrow_forwardA mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north of Johannesburg. SA mining corporation will have to decide if they should set up a mine in the newly discovered location. They will be using the most cost effective, but environmentally damaging method of gold mining sulfuric acid extraction. To go ahead SA mining corporation must spend $900,000 on new mining equipment and pay $165,000 for its installation. The goldmine will make an annual profit contribution of $350,000 each year over the next five years of the extraction. SA’s cost of capital is 14% and assume that cash flows occur at the end of each year. What is the NPV, and IRR of the project? Critically discuss how environmental effects should be considered when evaluating these types of projects (impact investing), include in your discussion the challenges in quantifying these issues in finance decisions of business organizations?arrow_forwardA mining company in South Africa has discovered a new gold vein in a mountain 150 kilometers north of Johannesburg. SA mining corporation will have to decide if they should set up a mine in the newly discovered location. They will be using the most cost effective, but environmentally damaging method of gold mining sulfuric acid extraction. To go ahead SA mining corporation must spend $900,000 on new mining equipment and pay $165,000 for its installation. The goldmine will make an annual profit contribution of $350,000 each year over the next five years of the extraction. SA’s cost of capital is 14% and assume that cash flows occur at the end of each year. What is the NPV, and IRR of the project? [Note: you are supposed to show every step of your calculation and interpret the resultarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education