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	$	460,000
Working capital required	$	160,000
Annual net cash receipts	$	175,000*
Cost to construct new roads in three years	$	52,000
Salvage value of equipment in four years	$	77,000

*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 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Required:
a.	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).)

b.

Should the project be accepted?

	Yes
	No

Answer 1

(a)-Net present value of the proposed mining project

	Cash Flow	PVIF at 18%	Present Value
Annual net cash receipts	1,75,000.00	2.69006	4,70,760.82
New equipment (1st year)	-4,60,000.00	1.00000	-4,60,000.00
Working capital required	-1,60,000.00	1.00000	-1,60,000.00
Cost to construct new roads in three years (3rd year)	-52,000.00	0.60863	-31,648.81
Salvage Value (4th year)	77,000.00	0.51579	39,715.74
Add: Working Capital (4th Year)	1,60,000.00	0.51579	82,526.22
Net Present Value			-$58,646.03

Net present value = -$58,646.03 (Negative NPV)

2. DECISION

“NO”. The Project should not be accepted, Since the Net present value of the proposed mining project is -$58,646.03 (Negative NPV)