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BUSI 320 Week 6 Fall 2104 Corporate Finance

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1.;11/24/14, 1:15 AM;award;1.00 point;Assume a corporation has earnings before depreciation and taxes of $113,000, depreciation of $40,000;and that it has a 30 percent tax bracket.;a. Compute its cash flow using the following format. (Input all answers as positive values.);Earnings before depreciation and taxes;Depreciation;$ 113000;Earnings before taxes;Taxes;$ 73000;Earnings after taxes;Depreciation;$ 51100;Cash flow;$ 91100;40000;21900;40000;b. How much would cash flow be if there were only $13,000 in depreciation? All other factors are the same.;Cash flow;$ 83000;c. How much cash flow is lost due to the reduced depreciation from $40,000 to $13,000?;Cash flow lost;$ 8100;View Hint #1;Worksheet;2.;Difficulty: Basic;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;award;1.00 point;The Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flows;are as follows;Year;1;2;3;4 10;Electric Co. Water Works;$ 60,000;$ 30,000;30,000;30,000;30,000;60,000;20,000;20,000;http://ezto.mheducation.com/hm.tpx;Page 1 of 18;Assignment Print View;11/24/14, 1:15 AM;a. Compute the payback period for both companies. (Round your answers to 1 decimal place.);Electric Co.;Water Works;Payback Period;years;years;b. Which of the investments is superior from the information provided?;Water Works;Electric Co.;rev: 04_16_2014_QC_48106, 08_08_2014_QC_48106;Worksheet;3.;Difficulty: Basic;Learning Objective: 12-03 The payback;method considers the importance of;liquidity, but fails to consider the time value;of money.;award;2.00 points;X-treme Vitamin Company is considering two investments, both of which cost $18,000. The cash flows are;as follows;Year;1;2;3;Project A;$20,000;8,000;7,000;Project B;$15,000;7,000;12,000;Use Appendix B for an approximate answer but calculate your final answer using the formula and financial;calculator methods.;a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal;places.);Project A;Project B;Payback Period;year(s);year(s);a-2. Which of the two projects should be chosen based on the payback method?;Project A;Project B;b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do;not round intermediate calculations and round your final answers to 2 decimal places.);Project A;Project B;Net Present Value;$;$;b-2. Which of the two projects should be chosen based on the net present value method?;Project A;Project B;http://ezto.mheducation.com/hm.tpx;Page 2 of 18;Assignment Print View;c.;11/24/14, 1:15 AM;Should a firm normally have more confidence in the payback method or the net present value;method?;Net present value method;Payback method;View Hint #1;Worksheet;Difficulty: Basic;4.;Learning Objective: 12-03 The payback;method considers the importance of;liquidity, but fails to consider the time value;of money.;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;1.00 point;You buy a new piece of equipment for $22,816, and you receive a cash inflow of $3,100 per year for 10;years. Use Appendix D for an approximate answer but calculate your final answer using the financial;calculator method.;What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a;percent rounded to 2 decimal places.);Internal rate of return;%;View Hint #1;Worksheet;5.;Difficulty: Basic;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;1.00 point;Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $32,000. The;annual cash inflows for the next three years will be;Year;1;2;3;Cash Flow;$ 16,000;14,000;9,000;Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial;calculator method.;a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer;as a percent rounded to 2 decimal places.);Internal rate of return;http://ezto.mheducation.com/hm.tpx;%;Page 3 of 18;Assignment Print View;11/24/14, 1:15 AM;b. With a cost of capital of 10 percent, should the equipment be purchased?;Yes;No;Worksheet;6.;Difficulty: Basic;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;2.00 points;The Pan American Bottling Co. is considering the purchase of a new machine that would increase the;speed of bottling and save money. The net cost of this machine is $66,000. The annual cash flows have the;following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final;answer using the formula and financial calculator methods.;Year Cash Flow;1;$ 31,000;2;36,000;3;4;5;33,000;26,000;12,000;a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do not;round intermediate calculations and round your final answer to 2 decimal places.);Net present value;$;b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a;percent rounded to 2 decimal places.);Internal rate of return;%;c. Should the project be accepted?;Yes;No;rev: 04_08_2014_48104;View Hint #1;Worksheet;7.;Difficulty: Intermediate;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;1.00 point;Turner Video will invest $62,500 in a project. The firms cost of capital is 6 percent. The investment will;provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer;http://ezto.mheducation.com/hm.tpx;Page 4 of 18;Assignment Print View;11/24/14, 1:15 AM;using the formula and financial calculator methods.;Year;1;2;3;4;5;Inflow;$ 17,000;19,000;23,000;27,000;31,000;The internal rate of return is 11 percent.;a. If the reinvestment assumption of the net present value method is used, what will be the total value of;the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round;intermediate calculations and round your answer to 2 decimal places.);Total value of inflows;$;b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value;of the inflows after five years? (Use the given internal rate of return. Do not round intermediate;calculations and round your answer to 2 decimal places.);Total value of inflows;$;c. Which investment assumption is better?;Reinvestment assumption of IRR;Reinvestment assumption of NPV;View Hint #1;Worksheet;8.;Difficulty: Intermediate;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;2.00 points;Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving;equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value;profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for;an approximate answer but calculate your final answer using the formula and financial calculator methods.;Project E;($46,000 investment);Year Cash Flow;1;$ 9,000;2;13,000;3;23,000;4;30,000;Project H;($45,000 investment);Year;Cash Flow;1;$ 24,000;2;18,000;3;14,000;a. Determine the net present value of the projects based on a zero percent discount rate.;Project E;Project H;http://ezto.mheducation.com/hm.tpx;Net Present Value;$;$;Page 5 of 18;Assignment Print View;11/24/14, 1:15 AM;b. Determine the net present value of the projects based on a discount rate of 12 percent. (Do not round;intermediate calculations and round your answers to 2 decimal places.);Net Present Value;Project E;Project H;$;$;c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 12;percent?;Project E;Project H;Both H and E;Worksheet;9.;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Difficulty: Challenge;award;4.00 points;Telstar Communications is going to purchase an asset for $680,000 that will produce $330,000 per year for;the next four years in earnings before depreciation and taxes. The asset will be depreciated using the threeyear MACRS depreciation schedule in Table 1212. (This represents four years of depreciation based on the;half-year convention.) The firm is in a 30 percent tax bracket.;Fill in the schedule below for the next four years. (Input all amounts as positive values. Round your;answers to the nearest whole dollar amount.);Year 1;Year 2;Year 3;Year 4;Earnings before depreciation and taxes;Depreciation;$;$;$;$;Earnings before taxes;Taxes;$;$;$;$;Earnings after taxes;Depreciation;$;$;$;$;Cash flow;$;$;$;$;View Hint #1;Worksheet;10.;Difficulty: Challenge;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;award;2.00 points;http://ezto.mheducation.com/hm.tpx;Page 6 of 18;Assignment Print View;11/24/14, 1:15 AM;The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS;depreciation. The cost is $120,000 and the asset will provide the following stream of earnings before;depreciation and taxes for the next four years: Use Table 12-12.;Year 1;Year 2;Year 3;Year 4;$ 52,000;60,000;36,000;27,000;The firm is in a 30 percent tax bracket and has a cost of capital of 8 percent. Use Appendix B for an;approximate answer but calculate your final answer using the formula and financial calculator methods.;a. Calculate 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;$;b. Under the net present value method, should Summitt Petroleum Corporation purchase the asset?;Yes;No;View Hint #1;Worksheet;11.;Difficulty: Challenge;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;2.00 points;An asset was purchased three years ago for $165,000. It falls into the five-year category for MACRS;depreciation. The firm is in a 35 percent tax bracket. Use Table 1212.;a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $19,560. (Input;all amounts as positive values. Do not round intermediate calculations and round your answers;to whole dollars.);Tax loss on the sale;Tax benefit;$;$;b. Compute the gain and related tax on the sale if the asset is sold now for $65,060. (Input all amounts as;positive values. Do not round intermediate calculations and round your answers to whole;dollars.);Taxable gain;$;Tax obligation;$;View Hint #1;http://ezto.mheducation.com/hm.tpx;Page 7 of 18;Assignment Print View;11/24/14, 1:15 AM;Worksheet;12.;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;Difficulty: Challenge;award;3.00 points;DataPoint Engineering is considering the purchase of a new piece of equipment for $210,000. It has an;eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of;$110,000 in nondepreciable working capital. Twenty-seven thousand dollars of this investment will be;recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation;and taxes for the next six are shown in the following table. Use Table 1211, Table 1212. Use Appendix B for an;approximate answer but calculate your final answer using the formula and financial calculator methods.;Year;1;2;3;4;5;6;Amount;$ 176,000;154,000;124,000;109,000;92,000;82,000;The tax rate is 40 percent. The cost of capital must be computed based on the following;Debt;Preferred stock;Common equity;(retained earnings);Kd;Kp;Cost;(aftertax);6.40%;10.40;Weights;35%;15;Ke;13.00;50;a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your;depreciation base and annual depreciation answers to the nearest whole dollar. Round your;percentage depreciation answers to 3 decimal places.);Year;1;2;3;4;5;6;Depreciation;Base;$;Percentage;Depreciation;Annual;Depreciation;$;$;b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year;6. (Do not round intermediate calculations and round your answers to 2 decimal places.);Year;1;2;http://ezto.mheducation.com/hm.tpx;Cash Flow;$;Page 8 of 18;Assignment Print View;11/24/14, 1:15 AM;3;4;5;6;c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter;your answer as a percent rounded to 2 decimal places.);Weighted average cost of capital;%;d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a;percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations.;Round your answer to 2 decimal places.);Net present value;$;d-2. Should DataPoint purchase the new equipment?;Yes;No;View Hint #1;Worksheet;13.;Difficulty: Challenge;Learning Objective: 12-05 The discount or;cutoff rate is normally the cost of capital.;award;5.00 points;Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $82,000.;The equipment falls into the five-year category for MACRS depreciation and can currently be sold for;$36,800.;A new piece of equipment will cost $250,000. It also falls into the five-year category for MACRS;depreciation.;Assume the new equipment would provide the following stream of added cost savings for the next six;years. Use Table 1212. Use Appendix B for an approximate answer but calculate your final answer using the;formula and financial calculator methods.;Year;1;2;3;4;5;6;Cash Savings;$63,000;53,000;51,000;49,000;46,000;35,000;The firms tax rate is 35 percent and the cost of capital is 8 percent.;a. What is the book value of the old equipment? (Do not round intermediate calculations and round;your answer to the nearest whole dollar.);Book value;http://ezto.mheducation.com/hm.tpx;$;Page 9 of 18;Assignment Print View;11/24/14, 1:15 AM;b. What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations and;round your answer to the nearest whole dollar.);Tax loss;$;c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your;answer to the nearest whole dollar.);Tax benefit;$;d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate;calculations and round your answer to the nearest whole dollar.);Cash inflow;$;e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.);(Do not round intermediate calculations and round your answer to the nearest whole dollar.);Net cost;$;f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and;annual depreciation answers to the nearest whole dollar. Round the percentage depreciation;factors to 3 decimal places.);Depreciation;Base;$;Year;1;2;3;4;5;6;Percentage;Depreciation;Annual;Depreciation;$;$;g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the;depreciation base and annual depreciation answers to the nearest whole dollar. Round the;percentage depreciation factors to 3 decimal places.);Year;1;2;3;4;Depreciation;Base;$;Percentage;Depreciation;Annual;Depreciation;$;h. Determine the incremental depreciation between the old and new equipment and the related tax shield;benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers;http://ezto.mheducation.com/hm.tpx;Page 10 of 18;Assignment Print View;11/24/14, 1:15 AM;to the nearest whole dollar.);Depreciation;on New;Equipment;Year;1;2;3;4;5;6;$;Depreciation;on Old;Equipment;$;Incremental;Depreciation;$;Tax Rate;Tax Shield;Benefits;$;i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded;to 2 decimal places. Round all other answers to the nearest whole dollar.);Year;1;2;3;4;5;6;Savings;$63,000;53,000;51,000;49,000;46,000;35,000;Aftertax;Savings;(1 Tax Rate);$;j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual;benefits. (Do not round intermediate calculations and round your answers to the nearest whole;dollar.);Year;1;2;3;4;5;6;Tax Shield;Benefits from;Depreciation;Aftertax;Cost Savings;$;Total Annual;Benefits;$;j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations;and round your answer to the nearest whole dollar.);Total annual benefits;$;k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e).;(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.;Round your answer to the nearest whole dollar.);Net present value;$;k-2. Should the replacement be undertaken?;http://ezto.mheducation.com/hm.tpx;Page 11 of 18;Assignment Print View;11/24/14, 1:15 AM;No;Yes;View Hint #1;Worksheet;14.;Difficulty: Challenge;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;2.00 points;Assume you are risk-averse and have the following three choices.;A;B;Expected;Value;$2,440;2,560;Standard;Deviation;$1,420;1,960;C;2,020;910;a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.);Projects;A;B;C;Coefficient of;Variation;b. Which project will you select?;Project A;Project B;Project C;View Hint #1;Worksheet;15.;Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;award;2.00 points;Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales;and the probabilities of their occurrence are given next;Possible;Market Reaction;Low response;Moderate response;High response;Very high response;Sales in;Units;20;35;45;60;Probabilities;.30;.20;.20;.30;a. What is the expected value of unit sales for the new product? (Do not round intermediate calculations;and round your answer to the nearest whole unit.);http://ezto.mheducation.com/hm.tpx;Page 12 of 18;Assignment Print View;11/24/14, 1:15 AM;units;Expected value;b. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round your;answer to 2 decimal places.);Standard deviation;units;View Hint #1;Worksheet;16.;Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;award;3.00 points;Shack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales.;Possible outcomes and probabilities of the outcomes are shown next.;Possible Outcomes;Ineffective campaign;Normal response;Extremely effective;Additional;Sales in Units Probabilities;50;.40;70;.30;130;.30;Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3;decimal places.);Coefficient of variation;View Hint #1;Worksheet;17.;Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;award;2.00 points;Five investment alternatives have the following returns and standard deviations of returns.;Returns;Alternatives Expected Value;A;$ 1,750;B;1,380;C;7,600;D;1,730;E;62,400;Standard;Deviation;$ 600;930;3,000;560;23,100;Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by;using the coefficient of variation. (Round your answers to 3 decimal places.);http://ezto.mheducation.com/hm.tpx;Page 13 of 18;Assignment Print View;11/24/14, 1:15 AM;Alternatives;Coefficient of;Variation;Rank;A;(Click to select);B;(Click to select);C;(Click to select);D;(Click to select);E;(Click to select);Worksheet;18.;Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;award;2.00 points;Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.;Investments;Buy stocks;Buy bonds;Buy commodity futures;Buy options;Returns;Expected Value;$ 9,010;7,030;26,800;21,200;Standard;Deviation;$ 6,470;2,460;23,900;21,500;a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.);Coefficient of;Variation;Buy stocks;Buy bonds;Buy commodity futures;Buy options;a-2. Which one of the following four investments should Tim choose?;Buy bonds;Buy stocks;Buy commodity futures;Buy options;b. Which one of the four investments should Mike choose?;Buy bonds;Buy stocks;Buy options;Buy commodity futures;View Hint #1;http://ezto.mheducation.com/hm.tpx;Page 14 of 18;Assignment Print View;11/24/14, 1:15 AM;Worksheet;19.;Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;award;2.00 points;Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway;Train Co. is more typical of the average corporation and is risk-averse.;Projects;A;B;C;D;Returns;Expected Value;$298,000;704,000;164,000;196,000;Standard;Deviation;$210,000;454,000;133,000;252,000;a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.);Coefficient of;Variation;Project A;Project B;Project C;Project D;a-2. Which projects should Mountain Ski Corp. choose?;Project A;Project B;Project D;Project C;b. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using;the coefficient of variation?;Project C;Project B;Project D;Project A;View Hint #1;Worksheet;20.;Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;award;2.00 points;Waste Industries is evaluating a $55,500 project with the following cash flows.;Years Cash Flows;1;$ 9,120;2;20,200;3;26,600;4;16,300;5;26,300;http://ezto.mheducation.com/hm.tpx;Page 15 of 18;Assignment Print View;11/24/14, 1:15 AM;The coefficient of variation for the project is.475.;Coefficient of;Variation;0.25;.26.50;.51.75;.76 1.00;1.01 1.25;Discount Rate;7%;9%;13%;16%;19%;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.;7%;19%;13%;9%;16%;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?;No;Yes;View Hint #1;Worksheet;21.;Difficulty: Intermediate;Learning Objective: 13-03 Because;investors dislike uncertainty, they will;require higher rates of return from risky;projects.;award;2.00 points;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 11;percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call;for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $102,000. The;inflows from projected business over the next five years are given next.;Years;1;2;3;4;5;Method 1;$32,100;38,500;47,800;35,100;20,600;http://ezto.mheducation.com/hm.tpx;Method 2;$17,600;25,500;40,400;37,000;72,200;Page 16 of 18;Assignment Print View;11/24/14, 1:15 AM;Use Appendix B for an approximate answer but calculate your final answers using the formula and financial;calculator methods.;a. Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and;round your answers to 2 decimal places.);Net Present Value;$;$;Method 1;Method 2;b. Which method should be selected using net present value analysis?;Method 1;Method 2;Neither of these;View Hint #1;Worksheet;22.;Difficulty: Intermediate;Learning Objective: 13-03 Because;investors dislike uncertainty, they will;require higher rates of return from risky;projects.;award;2.00 points;Debbys Dance Studios is considering the purchase of new sound equipment that will enhance the;popularity of its aerobics dancing. The equipment will cost $26,300. Debby is not sure how many members;the new equipment will attract, but she estimates that her increased annual cash flows for each of the next;five years will have the following probability distribution. Debbys cost of capital is 12 percent. Use Appendix;D for an approximate answer but calculate your final answers using the formula and financial calculator;methods.;Cash Flow;$ 3,890;5,190;7,550;9,800;Probability;.2;.3;.4;.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?;Yes;No;View Hint #1;Learning Objective: 13-01 The concept of;http://ezto.mheducation.com/hm.tpx;Page 17 of 18;Assignment Print View;11/24/14, 1:15 AM;Worksheet;23.;Difficulty: Intermediate;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;award;2.00 points;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 $1,645,000 and will produce $309,000 per year in years 5;through 15 and $515,000 per year in years 16 through 25. The U.S. gold mine will cost $2,054,000 and will;produce $252,000 per year for the next 25 years. The cost of capital is 9 percent. Use Appendix D for an;approximate answer but calculate your final answers using the formula and financial calculator methods.;(Note: In looking up present value factors for this problem, you need to work with the concept of a deferred;annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years, the returns in;years 16 through 25 represent 10 years.);a-1. Calculate the net present value for each project. (Do not round intermediate calculations and;round your answers to 2 decimal places.);The Australian mine;The U.S. mine;Net Present Value;$;$;a-2. Which investment should be made?;Australian mine;U.S. mine;b-1. Assume the Australian mine justifies an extra 1 percent premium over the normal cost of capital;because of its riskiness and relative uncertainty of cash flows. Calculate the new net present value;given this assumption. (Negative amount should be indicated by a minus sign. Do not round;intermediate calculations and round your answer to 2 decimal places.);The Australian mine;Net Present Value;$;b-2. Does the new assumption change the investment decision?;No;Yes;View Hint #1;Worksheet;http://ezto.mheducation.com/hm.tpx;Difficulty: Challenge;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.

 

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