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 $1,645,000 and will produce $309,000 per year
in years 5 through 15 and $515,000 per year in years 16 through 25.
The U.S. gold mine will cost $2,054,000 and will produce $252,000
per year for the next 25 years. The cost of capital is 9 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.)
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 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.)
b-2. Does the new assumption change the investment
decision?
yes
No
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