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 $ 470,000
Working capital required $ 165,000
Annual net cash receipts $ 180,000 *
Cost to construct new roads in year three $ 53,000
Salvage value of equipment in four years $ 78,000

*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 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?

Answer 1

Answer:- a)-The net present value of the proposed mining project is ($109799)

Explanation:-

Windhoek Mines Ltd.
Net Present Value
Particulars	Cash Flows	Present Value Factor @19%	Present value
	(a)	(b)	(c=a*b)
Net cash flow per year (For 4 years)	165000	2.6389	435419
New Equipment (1st Year)	-470000	1	-470000
Working Capital	-165000	1	-165000
Cost to construct new road (in 3 years)	-53000	0.5934	-31450
Salvage value (4th year)	78000	0.4989	38914
ADD:- Working capital	165000	0.4989	82319
Net Present Value			-109799

b)- The project should not be accepted due to negative net present value.