Question

Item 17Item 17Deep 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

Answer 1

Answer:

Precious Metals should accept the project since its NPV is greater than 0.

Explanation:

Find the Net present value of the project using the different discount rates for Deep Mining and Precious Metals companies. You can use a financial calculator with the following inputs;

Deep Mining

Note: use "CF" key on calculator

Initial investment; CFO = -950,000

Yr1 cashflow CF1 = 165,000

Frequency; F01 = 12 (because it is recurring for 12 years)

Interest rate ; I/Y = 16.2%

then CPT NPV = -$99,553.49

Precious Metals;

Initial investment; CFO = -950,000

Yr1 cashflow CF1 = 165,000

Frequency; F01 = 12 (because it is recurring for 12 years)

Interest rate ; I/Y = 13.4%

then CPT NPV = $9,059.05

Therefore,Precious Metals should accept the project since its NPV is greater than 0.