Problems s apected that the following cash fows would be associated with opening

Question

Problems s apected that the following cash fows would be associated with opening and operating a mine tm to he area Cost of new equipment and timbers working capital required Wet annual cash receipts Cost to construct new roads in three years Savage value of equipment in four years Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. as R275,000 100,000 120,000* 40,000 65,000 uld nt? he curency in Namibia is the rand, here denoted by R. ct Is esimated that the mineral deposit would be exhausted after four gyears of mining. At that point, the riz g capital would be released for reinvestment elsewhere. The companys discount rate is 20% eqaired (ignore taxes) the net present value of the proposed mining project. Should the project be accepted? Explain. 3Basic net present value analysis Time allowed: 20 minutes is currently done largely by hand. The machine the company is considering costs parts at the end of the sixth gear. These parts would cost 89,000, including ndy Company would like to buy a new machine that would automatically dip' chocolates. m. The T manufacturer estimates that the machine would be usable for 12 gears but would require the 12 years, the machine could be sold for about £7,500 will be only £7,000 per year. The present method estimates that the cost to operate the machine g chocolates dition to reducing costs, the new machine will increase costs £30,000 per year. In ad boxes of chocolates per year. The compan y realizes a contribution margin of £1.50 per ion by 6,000 ate of return is required on all investments

Explanation / Answer

Present Value of Cash outflows Year Amount PVF Pv Amount 0 Cost of machine 275000 1 275000 0 Working capital 100000 1 100000 1 0 2 0 3 Cost of construction 40000 0.578704 23148.15 4 0 Net cash outflow 398148.1 Present Value of Cash Inflows Year Amount PVF Pv Amount 1 Cash receipt 120000 0.833333 100000 2 Cash receipt 120000 0.694444 83333.33 3 Cash receipt 120000 0.578704 69444.44 4 Cash receipt 120000 0.482253 57870.37 4 released of working capital 100000 0.482253 48225.31 4 Salvage Value 65000 0.482253 31346.45 390219.9 NPV = Net Inflow - Net Outflow (390220 - 398148) = -7928 Note: Project should not be accepted because we have negative 7928 NPV

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