Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to
ID: 2475160 • Letter: W
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: 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 19%. Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)Explanation / Answer
Particulars
Now
1
2
3
4
Purchase of Equipment
(360,000)
Working capital investment
(110,000)
Annual cash receipts
140,000
140,000
140,000
140,000
Road Construction
(42,000)
Working capital Released
110,000
Salvage value of equipment
67,000
Total Cash flows
(470,000)
140,000
140,000
98,000
317,000
Discount factor @ 19%
1
0.84034
0.70616
0.59342
0.49867
Present value
(470,000)
117,647
98,863
58,155
158,078
Net Present value
(37,257)
Particulars
Now
1
2
3
4
Purchase of Equipment
(360,000)
Working capital investment
(110,000)
Annual cash receipts
140,000
140,000
140,000
140,000
Road Construction
(42,000)
Working capital Released
110,000
Salvage value of equipment
67,000
Total Cash flows
(470,000)
140,000
140,000
98,000
317,000
Discount factor @ 19%
1
0.84034
0.70616
0.59342
0.49867
Present value
(470,000)
117,647
98,863
58,155
158,078
Net Present value
(37,257)
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