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 $ 500,000 Working capital required $180,000 Annual net cash receipts $ 195,000* Cost to construct new roads in three years $ 56,000 Salvage value of equipment in four years 81,000 *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 22%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 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

NOW 1 2 3 4 PURCGASE OF EQUIPEMENT ($500000) - - - - WORKING CAPITAL ($180000) - - - - ANNUAL NET CASH RECEIPT NA $195000 $195000 $195000 $195000 ROAD CONSTRUCTION NA NA NA ($56000) NA WORKING CAPITAL RELEASED NA NA NA NA $180000 SALVAGE VALUE OF EQUIPEMENT NA NA NA NA $81000 TOTAL CASH FLOWS ($680000) $195000 $195000 $139000 $456000 DISCOUNTING FACTOR (22%) 1.000 0.8197 0.6719 0.5507 0.4514 PRESENT VALUE ($680000) $159841.5 $131020.5 $76547.3 $205838.4 NET PRESENT VALUE ($106752.3)

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