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 410,000 225,000 160,000 Cost of new equipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in $65,000 three years Salvage value of equipment in sgo.000 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 19% 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).) Now 2 4 Purchase of equipment Working capital investment Annual net caslh receipts Road construction Working capital released Salvage value of equipment Total cash flows Discount factor (19% Present value b. Should the project be accepted? Yes No

Explanation / Answer

NPV = Sum of all PVs of cashflows = -154,656.61

The project should not be accepted because NPV is negative

Now 1 2 3 4 Purchase of Equipment -410,000 Working Capital Investment -225,000 Annual net Cash receipts 160,000 160,000 160,000 160,000 Road construction -65,000 Working capital released 104000 Salvage value of equipment 90,000 Total Cashflows -635,000 160,000 160,000 95,000 354,000 Present value of cashflows -635,000 134453.78 112986.37 56374.50 176528.74

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