Highland Mining and Minerals Co. is considering the purchase of two gold mines.

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 $1,609,000 and will produce $370,000 per year in years 5 through 15 and $538,000 per year in years 16 through 25. The U.S. gold mine will cost $2,032,000 and will produce $312,000 per year for the next 25 years. The cost of capital is 5 percent.

Calculate the net present value for each project. (Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

If the Australian Mine justifies an extra 3 percent premium over the normal cost of capital because of its riskiness and the relative uncertainty of cash flows, recalculate the net present value of the mine.(Round "PV Factor" to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

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 $1,609,000 and will produce $370,000 per year in years 5 through 15 and $538,000 per year in years 16 through 25. The U.S. gold mine will cost $2,032,000 and will produce $312,000 per year for the next 25 years. The cost of capital is 5 percent.

Explanation / Answer

NPVs at 9%
Aus. $1,227,229.11
US: $511,870.69

NPV at 13%
Aus: $199,836.92

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