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 490,000 175,000 190,000* 55,000 $ 80,000 Cost of new equipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in year three Salvage value of equipment in four years 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%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required: a. What is the net present value of the proposed mining project? b. Should the project be accepted? Complete this question by entering your answers in the tabs below Required A Required B What is the net present value of the proposed mining project? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

Explanation / Answer

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Net Present Value Annual net cash inflows 190,000 Annuity factor for 4 years at 19% 2.6386 Present Value of Annual csh inflows 501334 Present value of salvage value 39896 ($ 80000* PVf at Year-4 i.e. 0.4987) Present value of working capital 87,273 ($ 175,000 *PVf at Year-4 i.e. 0.4987) Total Present value of Inflows 628503 Outflows Initial Investment 490000 Workin capital 175000 Present value of cost of road 32637 ($ 55000 *PVf at Year-3 i.e. 0.5934) Total Present value of outflows 697637 Net present value (638503-697637) -69134 No, Project shall not be accepted

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