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	$	370,000
Working capital required	$	115,000
Annual net cash receipts	$	130,000	*
Cost to construct new roads in year three	$	43,000
Salvage value of equipment in four years	$	68,000

*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

1
	Now	1	2	3	4
Cost of new equipment and timbers	-370000
Working capital required	-115000
Annual net cash receipts		130000	130000	130000	130000
Cost to construct new roads in year three				-43000
Working capital released					115000
Salvage value of equipment in four years					68000
Total cash flows	-485000	130000	130000	87000	313000
PV factor @ 18%	1	0.847	0.718	0.609	0.516
Present value of Total cash flows	-485000	110110	93340	52983	161508
Net present value	-67059
2
No, the project should not be accepted, as net present value is negative