10.00 points Hilly Mines, Inc., owns the mining rights to a large tract of land

Question

10.00 points Hilly 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 five years Salvage value of equipment in six years 910,000 $365,000" 255,000 $ 72,000 130,000 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 17%. (Ignore income taxes.) 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. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.) b. Should the project be accepted? Yes O No

Explanation / Answer

Relevant Items: Now Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cost of equipment required ($910,000) Working capital required ($255,000) Net annual cash receipts $365,000 $365,000 $365,000 $365,000 $365,000 $365,000 Cost of road repairs (Year 5) ($72,000) Equipment Salvage Value (Y6) $130,000 Working capital released $255,000 Total ($1,165,000) $365,000 $365,000 $365,000 $365,000 $293,000 $750,000 Accounting Approach: Timing of Cash 17% PV of Cash Flow PV Table Cash Relevant Items: Flows Amounts Factor Flows Cost of equipment required Now ($910,000) 1.000000 ($910,000.00) Working capital required Now ($255,000) 1.000000 ($255,000.00) Net annual cash receipts End of Ys 1-6 $365,000 3.589185 $1,310,052.44 Cost of road repairs in fifth years End of Year 5 ($72,000) 0.456111 ($32,840.00) Salvage value of equipment in 6 years End of Year 6 $130,000 0.389839 $50,679.02 Working capital released End of Year 6 $255,000 0.389839 $99,408.84 Net Present Value $262,300.29 Yes, the project should not be accepted; it has a positive net present value.

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