Question

Oxford Company has limited funds available for investment and must ration the funds among four competing...

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:

Project Investment
Required
Net
Present
Value
Life of
the
Project
(years)
Internal
Rate
of Return
A $ 890,000 $ 459,687 8 23 %
B $ 690,000 $ 227,448 13 16 %
C $ 590,000 $ 279,681 8 22 %
D $ 790,000 $ 159,067 4 19 %

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

Part A

Required:

1. Compute the project profitability index for each project.

project Project Probability Index

A ?
B ?
C ?
D ?

PART B

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 $ 310,000
Working capital required $ 190,000
Annual net cash receipts $ 125,000 *
Cost to construct new roads in year three $ 58,000
Salvage value of equipment in four years $ 83,000

*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 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

B. What is the net present value of the proposed mining project?

Homework Answers

Answer #1
1
Project Probability Index = Net Present Value /Investment Required
Project Project Probability Index
A 0.52 =459687/890000
B 0.33 =227448/690000
C 0.47 =279681/590000
D 0.20 =159067/790000
Part-B
Now Year 1 Year 2 Year 3 Year 4
Cost of new equipment and timbers -310000
Working capital required -190000
Annual net cash receipts 125000 125000 125000 125000
Cost to construct new roads in year three -58000
Salvage value of equipment in four years 83000
Working capital released 190000
Net cash flows -500000 125000 125000 67000 398000
Present value factor 1 0.847 0.718 0.609 0.516
Total present value -500000 105875 89750 40803 205368
Net present value -58204
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