Referee Mines, Inc., owns the mining rights to a large tract of land in a mounta

Question

Referee 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: Cost of equipment required Annual net cash receipts Working capital required Cost of road repairs in four years Salvage value of equipment in six years Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after six years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 19%. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factors) using tables. Required: Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "S" sign in your response.) Net present value Should the project be accepted? No

Explanation / Answer

As NPV is positive, the project should be accepted.

Period Cash flows PV factor at 19% Present value Cost of equipment Now (860,000) 1 (860,000) Working capital Now (245,000) 1 (245,000) Cost of road repairs Year 4 (70,000) 0.499 (34,930) Annual net cash receipts Year 1-6 345,000 3.410 1,176,450 Salvage value 6 110,000 0.352 38,720 Working capital released 6 245,000 0.352 86,240 NPV 161,480

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