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

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 22%. Required: a Determine the net present value of the proposed mining project.

Explanation / Answer

NPV is Positive hence project should be accepted.

Year 0 Year 1 Year 2 Year 3 Year 4 Cost of Equipment -$500,000.00 Working Capital -$180,000.00 $180,000.00 Annual Cash flow $195,000.00 $195,000.00 $195,000.00 $195,000.00 Salvage $81,000.00 Cost to Construct Road -$56,000.00 -$56,000.00 -$56,000.00 Net Cash Flow -$320,000.00 $139,000.00 $139,000.00 $139,000.00 $456,000.00 PVF @22% 1 0.81967213 0.6718624 0.55070689 0.45139909 Present Value -$320,000.00 $113,934.43 $93,388.87 $76,548.26 $205,837.98 Net Present Value $169,709.54

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