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 $ 410,000
Working capital required $ 210,000
Annual net cash receipts $ 145,000 *
Cost to construct new roads in year three $ 62,000
Salvage value of equipment in four years $ 87,000
*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 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?

Explanation / Answer

calculate net present value :

Net present value = -11256

b) Project should not be accepted

Year Description Cash flow Present value of cash flow 0 Cost of new equipment and timber -410000 -410000 0 Working capital -210000 -210000 1-4 Annual cash receipt 145000 145000*2.69 = 390050 3 Cost to construct new roads -62000 62000*0.609 = -37758 4 Salvage value 87000 87000*.516 = 44892 4 Working capital 410000 410000*.516 = 211560 Net present value -11256

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