29)

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 $1,630,000 and will produce $361,000 per year in years 5 through 15 and $555,000 per year in years 16 through 25. The U.S. gold mine will cost $2,020,000 and will produce $258,000 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.) 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 3 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.)

1 PV=A 1- (1+ i) Present value of an annuity of $1, PVFA Appendix D Percent 3% 4% 5% 8% Period 1% 2% 6% 7% 9% 10% 11% 12% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 .......... 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 2 2.941 .884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 3.902 3.808 3.630 3.037 3.717 3.546 3.465 3.387 3.312 3.240 3.170 3.102 4.713 3.696 3.605 5 4.853 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 5.417 4.623 4.486 4.355 6 5.795 5.601 5.242 5.076 4.917 4.767 4.231 4.111 7 6,728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 8. 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 9.787 8.760 8.306 7.499 6.805 6.207 5.938 11 10.368 9.253 7.887 7.139 6.495 12 9.385 8.863 7.943 11.255 10.575 9.954 8.384 7.536 7,161 6.814 6.492 6.194 13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7,904 7.487 7.103 6.750 6.424 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 15 13.865 12.849 11.938 11.118 10.380 9.712 9,108 8.559 8.061 7.606 7.191 6.811 8.313 7.824 16 14.7 18 12.561 11.652 10.838 10.106 9.447 8.851 7.379 6.974 13.578 17 14.292 13.166 11.274 10.477 9.763 9.122 8.544 7.549 7.120 15.562 12.166 8.022 18 14.992 13.754 11.690 10.059 9.372 8.756 7.702 7.250 16.398 12.659 10.828 8.201 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 7.963 20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.469 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 8.422 7.843 25.808 19.600 13.765 12.409 30 22.396 17.292 15.372 11.258 10.274 9.427 8.694 8.055 40 27.355 19.793 17.159 15.046 11.925 9.779 8.951 8.244 32.835 23.115 13.332 10.757 50 39.196 31.424 25.730 21.482 18.256 15.762 13.801 12.233 10.962 9.915 9.042 8.304 -- Present value of an annuity of $1 Appendix D (concluded) Percent 13% 14% 15% 18% 19% 25% 30% 35% 40% 50% Period 16% 17% 20% 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.800 0.769 0.741 0.714 0.667 1 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1,440 1.361 1.289 1.224 1.111 2.36 2.322 2.283 2.246 2.210 2.174 2.140 2.106 1.952 1.816 1.696 1.589 1.407 4 2.914 2.855 2.798 2.690 2.362 2.166 1.997 1.849 1.605 2.974 2.743 2.639 2.589 5 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.689 2.436 2.220 2.035 1.737 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 2.951 2.643 2.385 2.168 1.824 4.288 4.160 3.812 3.161 2.802 2.263 1.883 7 4.423 4.039 3.922 3.706 3.605 2.508 2.331 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.329 2.925 2.598 1.922 5.132 4.772 4.607 4.303 4.163 4.031 3.463 3.019 2.665 2.379 1.948 4.946 4.451 5.216 5.019 10 5.426 4.833 4.659 4.494 4.339 4.192 3.571 3.092 2.715 2.414 1.965 4.656 11 5,687 5.453 5.234 5.029 4.836 4.486 4.327 3.656 3.147 2.752 2.438 1.977 12 4.793 3.725 5.918 5.660 5.421 5.197 4.988 4.611 4.439 3.190 2.779 2.456 1.985 13 5.842 4.910 4.7 15 3.780 6.122 5.583 5.342 5.118 4.533 3.223 2.799 2.469 1.990 6.002 5.008 14 6.302 5.724 5.468 5.229 4.802 4.611 3.824 3.249 2.814 2.478 1.993 15 5.092 4.876 6.462 6.142 5.847 5.575 5.324 4.675 3.859 3.268 2.825 2.484 1.995 16 6.265 5.162 3.887 1.997 6.604 5.954 5.668 5.405 4.938 4.730 3.283 2.834 2.489 17 6.729 6.373 6.047 5.749 5.475 5.222 4.988 4.775 3.910 3.295 2.840 2.492 1.998 18 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 3.928 3.304 2.844 2.494 1.999 19 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4,843 3.942 3.311 2.848 2.496 1.999 20 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 3.954 3.316 2.850 2.497 1.999 25 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 3.985 3.329 2.856 2.499 2.000 3.995 30 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 3.332 2.857 2.500 2.000 4C 7.634 7,105 6.642 6.233 5.871 5.548 5.258 4.997 ,999 3.333 2.857 2.500 2.000 7.133 2.000 50.. . 7.675 6.66 6.246 5.880 5.554 5.262 4.999 4,000 3.333 2.857 2.500