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

ID: 2488588 • 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: 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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 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).) Should the project be accepted? Yes No

Explanation / Answer

(a)

Calculation of Net Present value of Proposed Mining Project:

Now

Purchase of Equipment

$ (410,000.00)

Working Capital investment

$ (210,000.00)

Annual Net cash receipts

$ 145,000.00

Road Construction

$ (62,000.00)

Working Capital released

$ 210,000.00

Salvage value of equipment

$ 87,000.00

Total Cash Flows (CF)

$ (620,000.00)

$ 145,000.00

$ 83,000.00

$ 442,000.00

Discount Factor (18%) (DF)

1.00000

0.84746

0.71818

0.60863

0.51579

Present value (PV) = CF*DF =

$ (620,000.00)

$ 122,881.70

$ 104,136.10

$ 50,516.29

$ 227,979.18

Net Present Value = Sum of PVs

$ (114,486.73)

(b)

The net present value of the project is negative, hence it should not be accepted.