Question

Which of the following cash flows is NOT an incremental cash flow associated with a project to dig a new gold mine?

Select one:

a. The cost of taking on new employees who will be hired to work on the mine site.

b. The cost of land which will be purchased for the new mine.

c. The cost of mining equipment which will be purchased for the new mine.

d. The cost of an environmental impact study which has been carried out to see if the gold mine under consideration can be dug without excessive impact on the environment.

What is the semi-annual payment on a $124,000 mortgage loan, repayable over 21 years, if the interest rate is 12% p.a., compounded semi-annually?

Select one:

a. $8078

b. $705

c. $8145

d. $818

Answer 1

Question a:

Option d is correct

The below is not incremental Cash Flow

The cost of an environmental impact study which has been carried out to see if the gold mine under consideration can be dug without excessive impact on the environment - Sunk cost

Sunk cost which is not relevant in calculating Net Present value or any valution

> The Cost of taking on new employees whoc willl be hired to work on the mine site - Incremental cash flow

> The cost of land which will be purchased for the new mine - Incremental Cash Flow

> The cost of mining equipment which will be purchased for the new mine - Incremental Cash Flow

Question 2:

Mortgage Loan Amount = PV = $124,000

r = semi annual interest rate = 12%/2 = 6%

n = 21*2 = 42 semi annual payments

Semi annual payment = [r*PV] / [1 - (1+r)^-n]

= [6% * $124,000] / [1 - (1+6%)^-42]

= $7,440 / 0.913472599

= $8,144.743485

Therfore, semi annual payment is $8,145

Option c is correct