Colorado Mining, Inc. and Tanzania Exploration, Ltd. are separate firms that are

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

Explanation / Answer

Neither Colorado mining nor Tanzania Exploration as NPV in both the cases are negitive PV of inflow Initial Outflow NPV 10 Years PVA at 9.4% of 82000 82000*6.197717         5,08,213            -6,75,000        -1,66,787 10 Years PVA at 8.4% of 82000 82000*6.590684         5,40,436            -6,75,000        -1,34,564 9.80% 8.40% 1 0.910747 1 0.922509225 2 0.82946 2 0.85102327 3 0.755428 3 0.785076818 4 0.688003 4 0.724240607 5 0.626597 5 0.668118641 6 0.570671 6 0.61634561 7 0.519737 7 0.568584511 8 0.473349 8 0.524524456 9 0.431101 9 0.48387865 10 0.392624 10 0.446382518 6.197717 6.590684306

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