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 $1,671,000 and will produce $326,000 per year in years 5 through 15 and $504,000 per year in years 16 through 25. The U.S. gold mine will cost $2,072,000 and will produce $285,000 per year for the next 25 years. The cost of capital is 10 percent.

1. Calculate the net present value for each project.

2. Which investment should be made?

Assume the Australian mine justifies an extra 4 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.

Answer 1