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 18%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

a. What is the net present value of the proposed mining project?

b. Should the project be accepted?

Cost of new equipment and timbers $ 380,000 Working capital required $ 120,000 Annual net cash receipts $ 135,000 * Cost to construct new roads in year three $ 44,000 Salvage value of equipment in four years $ 69,000

Explanation / Answer

Year(s) Cash flows PV factor Present value Cost of new equipment and timbers Now -380000 1 -380000 Working capital required Now -120000 1 -120000 Annual net cash receipts 1-4 135000 2.69 363150 Cost to construct new roads 3 -44000 0.609 -26796 Salvage value of equipment 4 69000 0.516 35604 Working capital released 4 120000 0.516 61920 Net present value -66122 b No , the project sgould not be accepted

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