36. Silver Dollar Mines is contemplating the purchase of equipment to exploit a
ID: 2793474 • Letter: 3
Question
36. Silver Dollar Mines 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:
Cost of new equipment and timbers 302,000
Working capital required 95,000
Net annual cash receipts 100,000
Cost to construct new roads in three years 80,000
Salvage value of equipment in four years 50,000
It is estimated that 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 12%. Ignore income tax effects.
Required: Determine the net present value of the proposed mining project. Should the project be accepted?
Explanation / Answer
Answer :-
Calculation of NPV
The project should not be accepted as NPV is negative.
Year 0 (Now) 1 2 3 4 Initial Investment (302000) Working Capital (95000) Annual Net Cash Receipts 100000 100000 100000 100000 Road Construction (80000) Salvage Value 50000 Working Capital 95000 Total Cash Flow (397000) 100000 100000 20000 245000 PVF 1 0.893 0.797 0.712 0.636 Discounted Cash Flow (397000) 89300 79700 14240 155820 Net present value (57940)Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.