Deep Mining and Precious Metals Are Separate Firms That Are

question 47

Multiple Choice

Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project.Deep Mining is in the actual mining business and has an aftertax cost of capital of 12.8 percent.Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 10.6 percent.The project under consideration has initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for ten years.Which firm(s) ,if either,should accept this project?

• A)Company A only
• B)Company B only
• C)both Company A and Company B
• D)neither Company A or Company B
• E)cannot be determined without further information

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Definitions:

Divisional Level

Pertains to a specific segment or area of operation within a larger organization, often responsible for their own budgets and strategy.

Futures Contract

A standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future.

Forward Contract

A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.