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 $ 460,000 Working capital required $ 160,000 Annual net cash receipts $ 175,000 * Cost to construct new roads in year three $ 52,000 Salvage value of equipment in four years $ 77,000 *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: a. What is the net present value of the proposed mining project? b. Should the project be accepted?

Answer 1

	Now	1	2	3	4
Cost of new equipment and timbers	-460000
Working capital required	-160000
Annual net cash receipts		175000	175000	175000	175000
Cost to construct new roads in three years				-52000
Working capital released					160000
Salvage value of equipment in four years					77000
Total cash flows	-620000	175000	175000	123000	412000
X PV factor	1	0.847	0.718	0.609	0.516
Present value	-620000	148225	125650	74907	212592
Net Present Value	-58626
b
No, The project should not be accepted, as net present value is negative