Question
23)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 $1,648,000 and will produce $338,000 per year in years 5 through 15 and $533,000 per year in years 16 through 25. The U.S. gold mine will cost $2,035,000 and will produce $275,000 per year for the next 25 years. The cost of capital is 12 percent. Use Appendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods. (Note: In looking up present value factors for this problem, you need to work with the concept of a deferred annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)
a-1.Calculate the net present value for each project. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Net Present Value The Australian mine$ The U.S. mine $
a-2.Which investment should be made? Australian mineU.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. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net Present Value The Australian mine$
b-2.Does the new assumption change the investment decision? YesNo
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Question
22)Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the popularity of its aerobics dancing. The equipment will cost $34,500. Debby is not sure how many members the new equipment will attract, but she estimates that her increased annual cash flows for each of the next five years will have the following probability distribution. Debby’s cost of capital is 13 percent. UseAppendix D for an approximate answer but calculate your final answers using the formula and financial calculator methods.
Cash FlowProbability$3,760 .2 5,760 .4 7,950 .3 10,050 .1 a.What is the expected value of the cash flow? The value you compute will apply to each of the five years. Expected Cash Flow$
b.What is the expected net present value? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places. )
Net Present Value $
c.Should Debby buy the new equipment? YesNo
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Question
21)Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 10 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 15 percent. Either method will require an initial capital outlay of $108,000. The inflows from projected business over the next five years are given next. YearsMethod 1Method 21$29,800 $19,500 2 38,000 23,800 3 40,300 38,000 4 37,700 35,600 5 28,700 76,700
Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods. a.Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Net Present Value Method 1$ Method 2$
b.Which method should be selected using net present value analysis? Method 1Method 2Neither of these
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Question
20) Waste Industries is evaluating a $53,800 project with the following cash flows. YearsCash Flows1$9,240 2 15,900 3 22,600 4 21,300 5 33,000 The coefficient of variation for the project is .975.
Coefficient of VariationDiscount Rate0−.25 4%.26−.50 9%.51−.75 10%.76−1.00 12%1.01− 1.25 18% Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a.Select the appropriate discount rate. 4%9%10%12%18%
b.Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.) Net present value$
c. Based on the net present value should the project be undertaken? NoYes
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