View the step-by-step solution to:

# 23) Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made.

23)

 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 \$1,648,000 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. (Do not round intermediate calculations and round your answers to 2 decimal places.)

 Net Present Value The Australian mine \$ The U.S. mine \$

a-2.

 Australian mine U.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. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 Net Present Value The Australian mine \$

b-2. Does the new assumption change the investment decision?

 Yes No

a-1. Calculate the net present value for each project. (Do not round intermediate calculations and Net Present Value
The Australian mine \$177,650.49 The U.S. mine \$121,863.26 a-2. Which investment...

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

### -

Educational Resources
• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents