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 60,000 Salvage value of equipment in four years 85,000 $ 330,000 $ 200,000 $135,000* 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%.

Explanation / Answer

a.

computation of net present value of project

b.Should the project be accepted.

No.

Since the Net Present Value of the project is negative project should not be accepted.

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