Question

Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namibia, is contemplating the purchase...

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?

Homework Answers

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
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