Solution-Does the investment decision change

Does the investment decision change

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Reference no: EM132501085

Foundations of Financial Management

Question: Canadian Metal, Mining and Petroleum Company are analyzing two projects for possible investment. Only one investment will be made. The first project is an oil drilling project in alberta at a cost of $500 million that will produce $100 million per year in years 5 through 10 and $200 million per year in years 11 through 20.

The second project is an expansion of an aluminum smelter in Mapletree quebec and will cost $500 million and will produce $87 million per year for years 2 through 20. The cost of capital is 12 percent.

Question a. Which investment should be made?

Question b. If the oil well project justifies an extra 4 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of flows, does the investment decision change?

Reference no: EM132501085

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Does the investment decision change

Reference no: EM132501085

Reference no: EM132501085

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