Silverado Mining Company is analyzing the purchase of two silver mines. Only one investment will be made.

The Yukon mine will cost $$2$ million,

The Yukon Mine will produce $$400,000$ per year

in Years $5$ through $15$ and $$800,000$ per year in Years $16$ through $25.$

The Labrador mine

will cost $$2\mathrm{.}4$ million and will produce $$300,000$ per year for the next $25$ years.

The cost of capital is $10$ percent.

a$.$ Which investment should be made?

b$.$ If the Yukon mine justifies an extra $4$ percent premium over the normal cost of capital because of its

riskiness and relative uncertainty of flows, does the investment decision change?

Solution: $($ how to find NPV answer on a financial calculatior$)$

Use the PV function to solve this problem.

a$.$ Which investment should be made?

Yukon

Initial cost $$2,000,000$

Cost of capital $10\%$ Years $5-15$ Years $16-25$

Cash flow per year $$400,000$ $$800,000$

Solution

Present value of years $5-15$ cash flows $$1,526,116$

Present value of years $16-25$ cash flows $$1,176,768$

Present value of the cash flows $$2,702,885$

Initial investment $$2,000,000$

Net present value $$702,885$

Labrador

Facts:

Initial cost $$2,400,000$

Cost of capital $10\%$

Years $1-25$ cash flow $$300,000$

Present value of cash flows $$2,723,112$

Initial investment $$2,400,000$

Net present value $$323,112$