Deep 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?

Question

Quizplus · Accepted Answer

To determine whether either firm should accept the project, we calculate the Net Present Value (NPV) for each firm using their respective after-tax cost of capital. The NPV formula is NPV = ∑(Ct / (1 + r)^t) - C0, where Ct is the cash inflow at time t, r is the discount rate (cost of capital), and C0 is the initial investment. For both firms, the NPV turns out to be negative, indicating that the project's returns do not cover the cost of capital for either firm. Therefore, neither firm should accept the project.

Deep Mining and Precious Metals Are Separate Firms That Are