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 Cost of new equipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in three years Salvage value of equipment in four years $ 340,000 $ 205,000 $140,000* $ 61,000 $ 86,000 Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth The mineral deposit would be exhausted after 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).) ow 2 4 Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment Total cash flows Discount factor (18%) Present value Net present value b. Should the project be accepted? O Yes 0

Explanation / Answer

Projrct Should not be accepted because Net Present Value of cash flow is negative.

Now 1 2 3 4 Purchase of Equipment -$340,000 Working Capital Investment -$205,000 Annual net cash receipts $140,000 $140,000 $140,000 $140,000 Road Construction -$61,000 Working capital released $205,000 Salvage value of equipment $86,000 Total cash flows -$545,000 $140,000 $140,000 $79,000 $431,000 Discount Factor ( 18%)                 1.00 0.8474 0.7182 0.6086 0.5158 Present Values -$545,000 $118,636 $100,548 $48,079 $222,310 NPV -$55,427

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