Colorado Mining, Inc. and Tanzania Exploration, Ltd. are separate firms that are
ID: 2737843 • Letter: C
Question
Colorado Mining, Inc. and Tanzania Exploration, Ltd. are separate firms that are both considering a new gold exploration project. Colorado Mining is in the actual gold mining business and has an after-tax cost of capital of 9.8 percent. Tanzania Exploration is in the precious gem retail business and has an after-tax cost of capital of 8.4 percent. The project under consideration has initial costs of $675,000 and anticipated annual cash inflows of $82,000 a year for ten years. Which firm(s), if either, should accept this project?
both Colorado Mining and Tanzania Exploration
neither Colorado Mining nor Tanzania Exploration
Colorado Mining only
Tanzania Exploration only
cannot be determined without further information
both Colorado Mining and Tanzania Exploration
neither Colorado Mining nor Tanzania Exploration
Colorado Mining only
Tanzania Exploration only
cannot be determined without further information
Explanation / Answer
neither Colorado Mining nor Tanzania Exploration Statement showing Cash flows Colorado Mining Particulars Time PVf@9.8% Amount PV Cash Outflows - 1.00 (675,000.00) (675,000.00) PV of Cash outflows = PVCO (675,000.00) Cash inflows 1.00 0.9107 82,000.00 74,681.24 Cash inflows 2.00 0.8295 82,000.00 68,015.70 Cash inflows 3.00 0.7554 82,000.00 61,945.08 Cash inflows 4.00 0.6880 82,000.00 56,416.29 Cash inflows 5.00 0.6266 82,000.00 51,380.95 Cash inflows 6.00 0.5707 82,000.00 46,795.04 Cash inflows 7.00 0.5197 82,000.00 42,618.43 Cash inflows 8.00 0.4733 82,000.00 38,814.60 Cash inflows 9.00 0.4311 82,000.00 35,350.27 Cash inflows 10.00 0.3926 82,000.00 32,195.15 PV of Cash Inflows =PVCI 508,212.76 NPV= PVCI - PVCO (166,787.24) Statement showing Cash flows Tanzania Exploration Particulars Time PVf@8.4% Amount PV Cash Outflows - 1.00 (675,000.00) (675,000.00) PV of Cash outflows = PVCO (675,000.00) Cash inflows 1.00 0.9225 82,000.00 75,645.76 Cash inflows 2.00 0.8510 82,000.00 69,783.91 Cash inflows 3.00 0.7851 82,000.00 64,376.30 Cash inflows 4.00 0.7242 82,000.00 59,387.73 Cash inflows 5.00 0.6681 82,000.00 54,785.73 Cash inflows 6.00 0.6163 82,000.00 50,540.34 Cash inflows 7.00 0.5686 82,000.00 46,623.93 Cash inflows 8.00 0.5245 82,000.00 43,011.01 Cash inflows 9.00 0.4839 82,000.00 39,678.05 Cash inflows 10.00 0.4464 82,000.00 36,603.37 PV of Cash Inflows =PVCI 540,436.11 NPV= PVCI - PVCO (134,563.89)