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 $330,000

Working capital required $200,000

Annual net cash receipts $135,000*

Cost to construct new roads in year three   $60,000

Salvage value of equipment in four years $85,000

*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%.

Discount factors below:

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/brewer_8e/exhibit_12B_1.jpg

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/accounting/brewer_8e/exhibit_12B_2.jpg

Question: What is the net present value of the proposed mining project?

Answer 1

	Now	1	2	3	4
Purchase of Equipment	-330000
Working Capital	-200000
Annual net cash receipts		135000	135000	135000	135000
Road construction				-60000
Working Capital released					200000
Salvage value					85000
Total cash flows	-530000	135000	135000	75000	420000
Discount factor(18%)	1	0.847	0.718	0.609	0.516
Present value	-530000	114345	96930	45675	216720
Net Present value	-56330
The project should not be accepted, as net present value is negative