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 $ 340,000 Working capital required $ 205,000 Annual net cash receipts $ 140,000* Cost to construct new roads in three years $ 61,000 Salvage value of equipment in four years $ 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).) b. Should the project be accepted? Yes No

Explanation / Answer

Windhoek Mines Limited All Amounts in $ Costs for the project -340000 Working Capital in Year 0 -205000 Net Cash Inflows per year for four years Receipts 140000 Costs incurred -61000 Salvage Value of Equipment 86000 Required Rate of Return 18% With this information, the Net Present Value of the project for Windhoek Mines Limited works out to -$ 161,159.08 Since the Net Present Value of the project is negative, hence it should not be accepted.

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