Question

YouAreAlmostDone Mines, Ltd., of Medicine Hat, 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 required and timbers $ 480,000
Working capital required $ 100,000
Annual net cash inflows* $ 185,000
Cost to construct new roads in three years $ 54,000
Salvage value of equipment in four years $ 79,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc.

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 15%.

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

Answer 1

Answer:- a)-The net present value of the proposed mining project is $15022

Explanation-

Dones Mines Ltd.
Net Present Value
Particulars	Cash Flows	Present Value Factor @15%	Present value
	(a)	(b)	(c=a*b)
Net cash flow per year (For 4 years)	185000	2.8550	528175
Cost of new Equipment & timbers (1st Year)	-480000	1	-480000
Working Capital	-100000	1	-100000
Cost to construct new road (in 3 years)	-54000	0.6575	-35505
Salvage value (4th year)	79000	0.5718	45172
ADD:- Working capital	100000	0.5718	57180
Net Present Value			15022

b)- The project should be accepted due to positive net present value.