Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to
ID: 2408023 • Letter: W
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:
*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.
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).)
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:
Explanation / Answer
a) Calculation of Net Present Value (Amounts in $)
Therefore, the net present value of the proposed mining project is negative (i.e. -64,265).
Particulars Now 1 2 3 4 Purchase of equipment -400,000 Working capital investment -130,000 Annual net cash receipts 145,000 145,000 145,000 145,000 Road Construction -46,000 Working capital released 130,000 Salvage value of equipment 71,000 Total cash flows (A) -530,000 145,000 145,000 99,000 346,000 Discount factor (18%) (B) 1 0.84746 0.71818 0.60863 0.51579 Present Value (A*B) -530,000 122,882 104,136 60,254 178,463 Net present value -64,265Related Questions
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