Question

Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 13.4 percent. The project under consideration has initial costs of $950,000 and anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s), if either, should accept this project? B) Precious Metals only C) Both Deep Mining and Precious Metals D) Neither Deep Mining nor Precious Metals E) Cannot be determined without further information A) Deep Mining only

Answer 1

Answer:

B) Precious Metals only

Explanation:

to determine which firm should accept the project, the net present value  for each company should be determined. Only firms with a positive NPV should accept the project because a negative NPV indicates that the project would be unprofitable for the firm

Net present value is the present value of after tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Deep Mining

Cash flow in year 0 = $-950,000

Cash flow each year from year 1 to 12 = $165,000

I = 16.2 percent.

NPV = $-99,553.49

Precious Metals

Cash flow in year 0 = $-950,000

Cash flow each year from year 1 to 12 = $165,000

I = 13.4 percent.

NPV = $9,059.05

Only Precious Metals should accept the project because it has a positive NPV.

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute