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Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to

ID: 2475160 • 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 19%. 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).)

Explanation / Answer

Particulars

Now

1

2

3

4

Purchase of Equipment

                  (360,000)

Working capital investment

                  (110,000)

Annual cash receipts

                             140,000

                                             140,000

                140,000

                            140,000

Road Construction

                (42,000)

Working capital Released

                            110,000

Salvage value of equipment

                              67,000

Total Cash flows

                  (470,000)

                             140,000

                                              140,000

                   98,000

                            317,000

Discount factor @ 19%

                                 1

                             0.84034

                                              0.70616

                0.59342

                            0.49867

Present value

                  (470,000)

                             117,647

                                                98,863

                   58,155

                            158,078

Net Present value

                    (37,257)

Particulars

Now

1

2

3

4

Purchase of Equipment

                  (360,000)

Working capital investment

                  (110,000)

Annual cash receipts

                             140,000

                                             140,000

                140,000

                            140,000

Road Construction

                (42,000)

Working capital Released

                            110,000

Salvage value of equipment

                              67,000

Total Cash flows

                  (470,000)

                             140,000

                                              140,000

                   98,000

                            317,000

Discount factor @ 19%

                                 1

                             0.84034

                                              0.70616

                0.59342

                            0.49867

Present value

                  (470,000)

                             117,647

                                                98,863

                   58,155

                            158,078

Net Present value

                    (37,257)

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