Hilly Mines, Inc., owns the mining rights to a large tract of land in a mountain
ID: 2471474 • Letter: H
Question
Hilly Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. 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:
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after ten years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 15%. (Ignore income taxes.)
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
Hilly Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. 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:
Explanation / Answer
a.
NPV of the project is calculated as under:
b.
Project should be accepted as the NPV is positive.
Equipment Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 NPV Cost of Equipment Required ($8,60,000) Working Capital Required ($2,00,000) Cost of Road Repairs in nine years -61,000 Total Cash outflow ($10,60,000) $0 $0 $0 $0 $0 $0 $0 $0 ($61,000) $0 Annual Net Cash receipts 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 2,55,000 Working Capital Released 2,00,000 Salvage value of equipment in 10 years 2,00,000 Total Cash inflow $0 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $6,55,000 Net Cash Flow ($10,60,000) $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $2,55,000 $1,94,000 $6,55,000 Life 10 years Required Rate of Return is 15% Present Value factor 1 0.870 0.756 0.658 0.572 0.497 0.432 0.376 0.327 0.284 0.247 Present Value of Cash outflow -10,60,000 -17,324 Present Value of Cash inflow 2,21,850 1,92,780 1,67,790 1,45,860 1,26,735 1,10,160 95,880 83,385 72,420 1,61,785 Net Present value -10,60,000 2,21,850 1,92,780 1,67,790 1,45,860 1,26,735 1,10,160 95,880 83,385 55,096 1,61,785 3,01,321Related Questions
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