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

ID: 2531630 • Letter: W

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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.

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).)

now 1-2-3-4

Explanation / Answer

Solution a:

Computation of NPV - Proposed Mining Project Particulars Period PV Factor Amount Present Value Cash outflows: Cost of Equipment and Timbers 0 1 $480,000.00 $480,000.00 Working capital 0 1 $170,000.00 $170,000.00 Cost to Construct New Roads in three years 3 0.60863 $54,000.00 $32,866.02 Present Value of Cash outflows (A) $682,866.02 Cash Inflows: Annual Cash Receipts Year 1 to 4 2.69006 $185,000.00 $497,661.10 Salvage Value 4 0.51579 $79,000.00 $40,747.41 Recovery of Working capital 4 0.51579 $170,000.00 $87,684.30 Present Value of Cash Inflows (B) $626,092.81 Net Present Value (NPV) (B-A) -$56,773.21

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

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

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