Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an after tax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an after tax cost of capital of 13.4 percent. The project under consideration has a free cash flow of -950,000 at time t=0 and anticipated annual free cash flows of $165,000 a year for the next 12 years. Which firm, if either, should accept this project?
I don't need the calculations but I need help interpreting the question. Is there an implication that Precious Metals' cost of capital for a mining project would be the same as Deep Mining's? Is this a trick question?
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