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 20%. Determine the net present value of the proposed mining project. Should the project be accepted? Explain.

Explanation / Answer

Project should not be accepted as it is having a negative NPV

Particulars Year PVF @ 20% Cash Flows PV Initial Cost 0                   1.00     -2,75,000.00 -2,75,000.00 Working capital required 1                   1.00     -1,00,000.00 -1,00,000.00 Cost to construct road 3                   0.58         -40,000.00       -23,148.15 Salvage value 4                   0.48          65,000.00        31,346.45 Annual Receipts 1 to 4                   2.59       1,20,000.00     3,10,680.00 Working capital required 4                   0.48       1,00,000.00        48,220.00 Net Present Value         -7,901.70

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

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