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 $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 through 15 actually represent 11 years, the returns in years 16 through 25 represent 10 years.) 0-1. 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 US mine

Answer 1

A B E F G H - J K L 1 Year 2 3 4 5 6 7 8 9 10 12 13 C D Australian Mine US Gold mine 0 (1,630,000.00) (2,020,000.00) 1 0 258,000.00 2 0 258,000.00 3 0 258,000.00 4 0 258,000.00 5 361,000.00 258,000.00 6 361,000.00 258,000.00 7 361,000.00 258,000.00 8 361,000.00 258,000.00 9 361,000.00 258,000.00 10 361,000.00 258,000.00 11 361,000.00 258,000.00 12 361,000.00 258,000.00 13 361,000.00 258,000.00 14 361,000.00 258,000.00 15 361,000.00 258,000.00 16 555,000.00 258,000.00 17 555,000.00 258,000.00 18 555,000.00 258,000.00 19 555,000.00 258,000.00 20 555,000.00 258,000.00 21 555,000.00 258,000.00 22 555,000.00 258,000.00 23 555,000.00 258,000.00 24 555,000.00 258,000.00 25 555,000.00 258,000.00 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 a - 1) 30 NPV @ 10% NPV(10%, C3:C27) + C2 787,856.36 NPV(10%, D3:D27) + D2 321,876.32 31 The investment should be made in Australian mine because it has higher NPV 32 33 a-2) 34 35 b-1) 36 since there is 3% risk premium NPV @ 13% NPV(13%, C3:C27) + C2 110,656.02 37 38 39 b-2) 40 Yes this assumption will change the decision because now the NPV of the Australian mine is less at 13% but of US mine is higher at 10% 41 42