Highland and Minerals Company is considering the purchase of two gold mines. Only one investment will be made. The Australian gold mine will cost $1,648,000 and will produce $325,000 per year in years 5 through 15 and $523,000 per year in years 16 through 25. The U.S. gold mine will cost $2,047,000 and will produce $253,000 per year for the next 25 years. The cost of capital is 11 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.

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.

b-2. Does the new assumption change the investment decision?

Yes

No