Riskness and relative uncertainty of cash flows

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Reference no: EM131023125

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 $1,649,000 and will produce $353,000 per year in years 5 through 15 and $503,00 per year in years 16 through 25. The US gold mine will cost $2,054.000 an will produce $282,00 per year for the next 25 years. The cost of the capital is 13 percent.

a. Which investment should be made? (Note: in looking up present value factors for this problem, you need to work with the concept of a deferred annuity for he Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in years 16 through 25 represent 10 years.)

b. If the Australian mine justifies an extra 2 percent premium over the normal cost of capital because of its riskness and relative uncertainty of cash flows, does the investment decision change?

Reference no: EM131023125

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