Question

Problem 13-16 Net Present Value Analysis [LO13-2]

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	$	450,000
Working capital required	$	155,000
Annual net cash receipts	$	170,000	*
Cost to construct new roads in year three	$	51,000
Salvage value of equipment in four years	$	76,000

*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 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

a)				Now	1	2	3	4
	purchase of Equipment			-450,000
	working capital investment			-155,000
	annual net cash receipt				170,000	170,000	170,000	170,000
	Road construction						-51,000
	working capital released							155,000
	salvage value of equipment							76,000
	total cash flows			-605,000	170000	170000	119000	401000
	discount factor (18%)			1	0.847	0.718	0.609	0.516
	present value			-605000	143990	122060	72471	206916
	net present value			-59,563
	(note I have used PV of $1 table figures at 18% rounded to three decimal places incase
	the figures given in your question table are upto five figures please use that one to
	get exact answer)
b)	N0