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 $1,600,000 and will produce $300,000 per year in years 5 through 15 and $500,000 per year in years 16 through 25. The U.S. gold mine will cost $2,000,000 and will produce $250,000 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.)

Answer 1

a) The Net present value of Australian Gold Mine = $466,300

The Net present value of U.S. Gold Mine = $ 269,250

b) The Net present value of Australian Gold Mine = - $393,900

At this increased cost of capital which is the discount rate ,the decision of selecting Australian Gold Mine should not be selected. in this case selecting the u.s Gold mine will be the best option

Step-by-step explanation: