Windhoek Mines, Ltd, of Namibia, is contemplating the purchase of equipment to e

Question

Windhoek Mines, Ltd, of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area: Cost of new equipment and timbers $ 480,000 $ 170,000 $ 185,000* $54,08ee $79,000 Working capital required Annual net cash receipts Cost to construct new roads in year three Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 18%. Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the appropriate discount factorís) using tables Required: a. What is the net present value of the proposed mining project? b. Should the project be accepted?

Explanation / Answer

A)

1)Initial investment = cost of new equipment + working capital required

                 = 480000+170000

                  = 650000

2)Terminal value at year4 = salvage value + working capital released

                    = 79000+170000

                    = 249000

3)present value of cash flow = [PVA 18%,4* Annual cash receipts ] +[PVF 18%,3*Cost of construction ] +[PVF 18%,4* Terminal value]

= [2.69006*185000]+[.60863*-54000]+[.51579*249000]

= 497661.1 - 32866.02+ 128431.71

= $ 593226.79 [rounded to 593227]

NPV = present value -initial investment

       = 593227-650000

       = - 56773

b)since NPV is negative ,project should be rejected.

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