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 330,000 s Cost of new equipment and Working capital required Annual net cash receipts Cost to construct new roads in Salvage value of equipment in timbers 200,000 S s135,000* $ 60,000 $ 85,000 three years four 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 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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required a. 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).) Purchase of uipment Working capital investment Annual net cash recei Road construction Working capital release Salvage value of uipment Total cash flows Discount factor (18%) Present value Net present value b. Should the project be accepted? O No

Explanation / Answer

a)

Note: the depreciation on equipment will not affect the cash flow as there is not tax and consequently there will be no tax advantage on depreciation

b)

The project should not be accepted as the NPV is negative.

Year NPV 0 1 2 3 4 Purchase of equipment $ -3,30,000 Working capital investment $ -2,00,000 Annual net cash receipts $ 1,35,000 $ 1,35,000 $ 1,35,000 $ 1,35,000 Road construction $     -60,000 working capital released $ 2,00,000 Salvage value of equipment $     85,000 Total cash flows $ -5,90,000 $ 1,35,000 $ 1,35,000 $ 1,35,000 $ 4,20,000 discount factor 1 0.847 0.718 0.609 0.516 present value $ -5,90,000 $ 1,14,345 $     96,930 $     82,215 $ 2,16,720 $ -79,790

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