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:

   

*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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

  

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).)

     

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:

Explanation / Answer

a.CALCULATION OF NET PRESENT VALUE OF PROPOSED MINING PROJECT

b.NO.THE PROJECT SHOULD NOT BE ACCEPTED AS THE NET PRESENT VALUE IS NEGATIVE.

a.CALCULATION OF NET PRESENT VALUE OF PROPOSED MINING PROJECT

YEAR 0 1 2 3 4 NEW EQUIPMENT AND TIMBER -3,40,000 WORKING CAPITAL -2,05,000 ANNUAL CASH RECEIPT 1,40,000 1,40,000 1,40,000 1,40,000 NEW ROAD -61,000 SALVAGE VALUE+WORKING CAPITAL 2,91,000 NET CASH FLOW -5,45,000 1,40,000 1,40,000 79,000 4,31,000 PV FACTOR@18% 0.847 0.718 0.609 0.516 PRESENT VALUE -5,45,000 1,18,580 1,00,520 48,111 2,22,396 NET PRESENT VALUE -55,393

b.NO.THE PROJECT SHOULD NOT BE ACCEPTED AS THE NET PRESENT VALUE IS NEGATIVE.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.